Derivatives Clearing Organization General Provisions and Core Principles, 22226-22317 [2019-09025]

Download as PDF 22226 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 39, and 140 RIN 3038–AE66 Derivatives Clearing Organization General Provisions and Core Principles Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. AGENCY: The Commodity Futures Trading Commission (Commission) is proposing amendments to certain regulations applicable to registered derivatives clearing organizations (DCOs). These proposed amendments would, among other things, address certain risk management and reporting obligations, clarify the meaning of certain provisions, simplify processes for registration and reporting, and codify existing staff relief and guidance. In addition, the Commission is proposing technical amendments to certain provisions, including certain delegation provisions, in other parts of its regulations. DATES: Comments must be received by July 15, 2019. ADDRESSES: You may submit comments, identified by ‘‘Derivatives Clearing Organization General Provisions and Core Principles’’ and RIN 3038–AE66, by any of the following methods: • CFTC Comments Portal: https:// comments.cftc.gov. Select the ‘‘Submit Comments’’ link for this rulemaking and follow the instructions on the Public Comment Form. • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https:// comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt khammond on DSKBBV9HB2PROD with PROPOSALS2 SUMMARY: VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 information may be submitted according to the procedures established in § 145.9 of the Commission’s regulations.1 The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 202–418–5096, edonovan@cftc.gov; Parisa Abadi, Associate Director, 202– 418–6620, pabadi@cftc.gov; Eileen R. Chotiner, Senior Compliance Analyst, 202–418–5467, echotiner@cftc.gov; Abigail S. Knauff, Special Counsel, 202– 418–5123, aknauff@cftc.gov; Division of Clearing and Risk, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Project KISS B. Regulatory Framework for DCOs II. Amendments to Part 1—General Regulations Under the Commodity Exchange Act A. Written Acknowledgment From Depositories—§ 1.20 B. Governance and Conflicts of Interest— §§ 1.59, 1.63, and 1.69 III. Amendments to Part 39—Subpart A— General Provisions Applicable to DCOs A. Definitions—§ 39.2 B. Procedures for Registration—§ 39.3 C. Procedures for Implementing DCO Rules and Clearing New Products IV. Amendments to Part 39—Subpart B— Compliance With Core Principles A. Compliance With Core Principles— § 39.10 B. Financial Resources—§ 39.11 C. Participant and Product Eligibility— § 39.12 D. Risk Management—§ 39.13 E. Treatment of Funds—§ 39.15 F. Default Rules and Procedures—§ 39.16 G. Rule Enforcement—§ 39.17 H. Reporting—§ 39.19 I. Public Information—§ 39.21 J. Governance Fitness Standards, Conflicts of Interest, and Composition of Governing Boards—§§ 39.24, 39.25, and 39.26 1 17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I (2018), and are accessible on the Commission’s website at https://www.cftc.gov/LawRegulation/Commodity ExchangeAct/index.htm. PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 K. Legal Risk—§ 39.27 L. Fully-Collateralized Positions V. Amendments to Part 39—Subpart C— Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject to the Provisions A. Financial Resources for SIDCOs and Subpart C DCOs—§ 39.33 B. Risk Management for SIDCOs and Subpart C DCOs—§ 39.36 C. Additional Disclosure for SIDCOs and Subpart C DCOs—§ 39.37 D. Corrections to Subpart C Regulations VI. Amendments to Appendix A to Part 39— Form DCO VII. Amendments to Appendix B to Part 39— Subpart C Election Form VIII. Amendments to Part 140—Organization, Functions, and Procedures of the Commission IX. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations D. Antitrust Considerations I. Background A. Project KISS The Commission is engaging in an agency-wide review of its rules, regulations, and practices to make them simpler, less burdensome, and less costly, and to make progress on G–20 regulatory reforms. This initiative is called Project KISS, which stands for ‘‘Keep It Simple, Stupid.’’ 2 Consistent with these objectives, the Commission is proposing amendments to regulations applicable to DCOs to, among other things, enhance certain risk management and reporting obligations, clarify the meaning of certain provisions, simplify processes for registration and reporting, and codify existing relief and guidance. B. Regulatory Framework for DCOs Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth core principles with which a DCO must comply in order to be registered and to maintain registration as a DCO (DCO Core Principles).3 In 2011, the Commission adopted regulations in 2 See Remarks of Acting Chairman J. Christopher Giancarlo before the 42nd Annual International Futures Industry Conference in Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/ PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017, President Donald J. Trump issued Executive Order 13777: Enforcing the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs federal agencies, among other things, to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force. Although the CFTC, as an independent federal agency, is not bound by E.O. 13777, the Commission is nevertheless engaging in an agency-wide review of its rules, regulations, and practices to make them simpler, less burdensome, and less costly. See Request for Information, 82 FR 23756 (May 24, 2017). 3 7 U.S.C. 7a–1. E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 subparts A and B of part 39 to implement the DCO Core Principles.4 In 2013, the Commission adopted regulations in subpart C of part 39 5 to establish additional standards for compliance with the DCO Core Principles for those DCOs that have been designated as systemically important (SIDCOs) by the Financial Stability Oversight Council in accordance with Title VIII of the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).6 The subpart C regulations are consistent with the Principles for Financial Market Infrastructures (PFMIs), published by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO).7 Other DCOs may elect to opt-in to the subpart C requirements (subpart C DCOs) in order to achieve status as a qualifying central counterparty (QCCP).8 Since the part 39 regulations were adopted, Commission staff has worked 4 See Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011) (codified at 17 CFR part 39); Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9, 2012) (further amending § 39.12). 5 Derivatives Clearing Organizations and International Standards, 78 FR 72476 (Dec. 2, 2013). 6 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 7 See CPMI–IOSCO, Principles for Financial Market Infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD377.pdf. 8 In July 2012, the Basel Committee on Banking Supervision, the international body that sets standards for the regulation of banks, published the ‘‘Capital Requirements for Bank Exposures to Central Counterparties’’ (Basel CCP Capital Requirements), which describes standards for capital charges arising from bank exposures to central counterparties (CCPs) related to over-thecounter derivatives, exchange-traded derivatives, and securities financing transactions. The Basel CCP Capital Requirements create financial incentives for banks, including their subsidiaries and affiliates, to clear financial derivatives with CCPs that are prudentially supervised in a jurisdiction where the relevant regulator has adopted rules or regulations that are consistent with the standards set forth in the PFMIs. Specifically, the Basel CCP Capital Requirements introduce new capital charges based on counterparty risk for banks conducting financial derivatives transactions through a CCP. These incentives include (1) lower capital charges for exposures arising from derivatives cleared through a QCCP, and (2) significantly higher capital charges for exposures arising from derivatives cleared through nonqualifying CCPs. A QCCP is defined as an entity that (i) is licensed to operate as a CCP and is permitted by the appropriate regulator to operate as such, and (ii) is prudentially supervised in a jurisdiction where the relevant regulator has established and publicly indicated that it applies to the CCP, on an ongoing basis, domestic rules and regulations that are consistent with the PFMIs. The failure of a CCP to achieve QCCP status could result in significant costs to its bank customers. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 with DCOs to address questions regarding interpretation and implementation of the requirements established in the regulations. In light of this, the Commission believes it would be helpful to revise or clarify certain provisions of part 39 and to codify staff relief or guidance granted in the interim. The Commission is also proposing a few new requirements with respect to default procedures and event-specific reporting in response to recent events. The Commission believes these changes will provide greater clarity and transparency for DCOs and DCO applicants and lead to more effective DCO compliance and risk management generally. The Commission has carefully considered the costs and benefits associated with the proposed amendments, and invites commenters to provide data and analysis regarding any aspect of the proposed rulemaking. In addition to the amendments proposed herein, the Commission requests comment for any other aspects of part 39 that commenters believe the Commission should clarify or otherwise amend. II. Amendments to Part 1—General Regulations Under the Commodity Exchange Act A. Written Acknowledgment From Depositories—§ 1.20 Regulation 1.20(d)(1) requires that a futures commission merchant (FCM) obtain a written acknowledgment from each depository with which the FCM deposits futures customer funds.9 The written acknowledgment must conform to a template letter set forth in appendix A to § 1.20, and the template letter includes certain requirements set forth in § 1.20(d)(3) through (6). Regulation 1.20(d)(1) further provides, however, that an FCM is not required to obtain a written acknowledgment from a DCO that has adopted rules that provide for the segregation of customer funds in accordance with all relevant provisions of the CEA and the Commission’s rules and orders thereunder. The Commission is proposing to amend § 1.20(d) to clarify that the requirements listed in § 1.20(d)(3) through (6) do not apply to a DCO, or to an FCM that clears through that DCO, if the DCO has adopted rules that provide for the segregation of customer funds. The proposed changes are not intended to be substantive, but rather to reflect the Commission’s intent when § 1.20 was last amended. 9 Regulation 22.5 applies the written acknowledgment letter requirements of § 1.20(d) to FCMs and DCOs in connection with the holding of cleared swaps customer collateral. PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 22227 Nonetheless, the Commission emphasizes that it has ample means of obtaining information regarding accounts held at a DCO under § 1.20 by virtue of its ongoing oversight and supervision of DCOs. The Commission also is proposing to amend § 1.20(d)(7) and (8) to explicitly account for FCMs that deposit customer funds with a DCO and thus are not required to obtain a written acknowledgment letter. B. Governance and Conflicts of Interest—§§ 1.59, 1.63, and 1.69 In the course of adopting the current part 39 regulations, the Commission removed and replaced § 39.2,10 which had exempted DCOs from all Commission regulations except for those specified therein (the ‘‘§ 39.2 exemption’’). The Commission noted that the § 39.2 exemption failed to account for regulations applicable to DCOs that were adopted later, such as § 1.49.11 The Commission further noted that removal of the § 39.2 exemption would subject DCOs only to § 1.49 and three additional regulations: §§ 1.59 (activities of self-regulatory organization employees, governing board members, committee members, and consultants); 1.63 (service on self-regulatory organization governing boards or committees by persons with disciplinary histories); and 1.69 (voting by interested members of self-regulatory organization governing boards and various committees).12 The Commission explained that these three provisions would be superseded by regulations the Commission had proposed to implement Core Principles O (Governance Arrangements), P (Conflicts of Interest), and Q (Composition of Governing Boards).13 However, the Commission did not adopt those regulations, and §§ 1.59, 1.63, and 1.69 became applicable to DCOs. The Commission is now proposing to adopt implementing regulations for Core Principles O, P, and Q by moving certain requirements from subpart C, which is applicable to only SIDCOs and subpart C DCOs, to subpart B, which is applicable to all registered 10 The current § 39.2 sets forth definitions of terms used in part 39. 11 See Risk Management Requirements for Derivatives Clearing Organizations, 76 FR 3698, 3714 (Jan. 20, 2011) (proposed rule). 12 Id. at 3714 & n.77. 13 See Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010) (proposed rule); Governance Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities; Additional Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011) (proposed rule). E:\FR\FM\16MYP2.SGM 16MYP2 22228 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules DCOs (discussed further below). Therefore, the Commission is proposing to restore DCOs’ exemption from §§ 1.59, 1.63, and 1.69 by removing ‘‘clearing organization’’ from the definition of ‘‘self-regulatory organization’’ in each of those regulations. The Commission is also proposing to amend § 1.64 to remove language that makes clear that the provision does not apply to DCOs. The amendments to the other provisions make that language no longer necessary. III. Amendments to Part 39—Subpart A—General Provisions Applicable to DCOs A. Definitions—§ 39.2 Regulation 39.2 sets forth definitions applicable to terms used in part 39 of the Commission’s regulations. Since § 39.2 was adopted, the Commission has adopted definitions for some of the same terms that apply in other Commission regulations. Accordingly, the Commission is proposing amendments to § 39.2 in order to maintain consistency with terms defined elsewhere in Commission regulations and to provide clarity with respect to the use of these terms. khammond on DSKBBV9HB2PROD with PROPOSALS2 1. Business Day Regulation 39.19(b)(3) defines ‘‘business day,’’ but because the definition is contained within § 39.19, it is not clear that it is applicable to uses of the term ‘‘business day’’ elsewhere in part 39. The Commission is therefore proposing to remove § 39.19(b)(3) and include the definition of ‘‘business day’’ in § 39.2. The Commission also is proposing to clarify that the term ‘‘Federal holidays’’ in the ‘‘business day’’ definition refers to the schedule of U.S. federal holidays established under 5 U.S.C. 6103. The Commission is specifying this because some DCOs registered with the Commission are located outside the United States. Finally, the Commission is defining ‘‘foreign holiday’’ as a day on which a DCO and its domestic financial markets are closed for a holiday that is not a Federal holiday in the United States, and adding the term to the list of exceptions to the definition of ‘‘business day.’’ The Commission believes there is no reason to require foreign DCOs to report on a non-trading day. 2. Customer Regulation 39.2 defines ‘‘customer,’’ for purposes of part 39, as a person trading in any commodity named in the definition of ‘‘commodity’’ in section 1a(9) of the CEA or in § 1.3 of the Commission’s regulations, or in any VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 swap as defined in section 1a(47) of the CEA or in § 1.3. The definition further distinguishes a customer from the owner or holder of a house account. After § 39.2 was adopted, the Commission amended the definition of ‘‘customer’’ in § 1.3, to mean any person who uses a futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator as an agent in connection with trading in any commodity interest. The Commission also amended the definition of ‘‘commodity interest’’ in § 1.3 to include any swap as defined in the CEA, by the Commission, or jointly by the Commission and the Securities and Exchange Commission. Because the definition of ‘‘customer’’ in § 1.3 now encompasses the definition in § 39.2, the Commission believes that the definition in § 39.2 is unnecessary and may create uncertainty. Therefore, the Commission is proposing to remove the definition of ‘‘customer’’ in § 39.2, leaving the definition in § 1.3 as the applicable definition for purposes of part 39. 3. Customer Account or Customer Origin Regulation 39.2 defines ‘‘customer account or customer origin’’ as a clearing member account held on behalf of customers that is subject to section 4d(a) or section 4d(f) of the CEA. After § 39.2 was adopted, the Commission adopted the definition of ‘‘customer account’’ in § 1.3 to include both a futures account and a cleared swaps customer account, which are accounts subject to sections 4d(a) and 4d(f) of the CEA, respectively. The Commission believes that having a definition of ‘‘customer account or customer origin’’ in § 39.2 and a definition of ‘‘customer account’’ in § 1.3 may create uncertainty. Because the part 39 regulations use both ‘‘customer account’’ and ‘‘customer origin’’ terms, the Commission is proposing to amend the definition of ‘‘customer account or customer origin’’ in § 39.2 to cross-reference the definition of ‘‘customer account’’ in § 1.3, rather than removing the definition or the term ‘‘customer origin.’’ 4. Enterprise Risk Management The Commission is proposing to define ‘‘enterprise risk management’’ because the term is used in proposed § 39.10(d), which is discussed below. 5. Fully-Collateralized Position The Commission is proposing to define ‘‘fully-collateralized position’’ in PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 conjunction with proposed exceptions from several part 39 regulations for DCOs that clear fully-collateralized positions, as discussed below. 6. Key Personnel The Commission is proposing to add ‘‘chief information security officer’’ to the list of positions identified in the definition of ‘‘key personnel’’ in § 39.2. In the event of a cybersecurity incident, it is critical that Commission staff be able to quickly contact the person at each DCO responsible for responding to the incident to assess the DCO’s response as well as to coordinate efforts among DCOs as necessary. B. Procedures for Registration—§ 39.3 1. Application Procedures—§ 39.3(a) The Commission is proposing to make several changes to its procedures for registration as a DCO, set forth in § 39.3. Regulation 39.3(a)(1) refers to ‘‘[a]n organization desiring to be registered as a [DCO],’’ while § 39.3(a)(2) refers to ‘‘[a]ny person seeking to register as a [DCO].’’ To make the language consistent, the Commission is proposing to revise § 39.3(a)(1) and (2) to refer to an ‘‘entity seeking to register as a [DCO].’’ The Commission is proposing additional changes to § 39.3(a)(1) to improve the clarity of the text. Regulation 39.3(a)(2) requires an applicant for DCO registration to submit to the Commission a completed Form DCO, which is provided in appendix A to part 39.14 Since the adoption of Form DCO, the Commission has identified several areas in which changes to Form DCO are needed. Many of the revisions to the part 39 regulations proposed herein would require corresponding changes to Form DCO. Therefore, the Commission is proposing to revise Form DCO as discussed in Section VI. below. Regulation 39.3(a)(3) provides that at any time during the application review process, the Commission may request that the DCO applicant submit supplemental information in order for the Commission to process the application. An applicant is required to ‘‘file electronically’’ such supplemental information with the Secretary of the Commission, in the format and manner specified by the Commission. The Commission is proposing to amend § 39.3(a)(3) to require an applicant to ‘‘provide’’ such supplemental information and to delete the 14 At the time § 39.3(a)(2) was adopted, Form DCO was the only appendix to part 39. Since then, appendices have been added to part 39, and Form DCO is now set forth in appendix A. Therefore, the Commission is proposing to revise § 39.3(a)(2) to reference ‘‘Form DCO . . . as provided in appendix A to this part.’’ E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules requirement that it be filed with the Secretary of the Commission. By making these changes, yet retaining the requirement that the information be provided in the format and manner specified by the Commission, the Commission and DCO applicants would have greater flexibility. For example, the Commission would be able to permit an applicant to provide requested information through a presentation to Commission staff. Regulation 39.3(a)(5) provides for certain sections of a DCO application to be made public, including the ‘‘first page of the Form DCO cover sheet.’’ The regulation refers to Form DCO as it appears in the print edition of the Code of Federal Regulations. However, the Commission is aware that Form DCO may appear differently in other sources, so the Commission is proposing to amend § 39.3(a)(5) to specify that the ‘‘first page of the Form DCO cover sheet (up to and including the General Information section)’’ will be made public. The Commission is also proposing to revise the provision to include specific references to the Form DCO exhibits that will be made public. Finally, the Commission is proposing to adopt new § 39.3(a)(6), which would permit the Commission to extend the 180-day review period for DCO applications specified in § 39.3(a)(1) for any period of time to which the applicant agrees in writing. This provision would be similar to § 40.5(d)(2), which allows the Commission to extend the review period for rules submitted for Commission review and approval, if the registered entity that submitted the rule agrees in writing. The Commission believes it is important to have the ability to extend the review period for a DCO application so that, in the event that any issues or concerns arise that cannot be resolved in a timely manner, the Commission does not find itself in the position of having to deny the application. khammond on DSKBBV9HB2PROD with PROPOSALS2 2. Stay of Application Review—§ 39.3(b) Regulation 39.3(b)(2) provides for delegation to the Director of the Division, with the concurrence of the General Counsel, the authority to notify an applicant ‘‘seeking designation under section 6(a) of the [CEA]’’ that the application is materially incomplete and the running of the 180-day period is stayed. By its terms, section 6(a) of the CEA applies only to designation of contract markets. However, under § 39.3(a), the Commission applies the same procedures to DCO applications. Because DCOs are ‘‘registered’’ and not ‘‘designated,’’ the Commission is VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 substituting ‘‘registration’’ for ‘‘designation’’ in § 39.3(b)(2). 3. Amendment of an Order of Registration—§ 39.3(a)(2) Regulation 39.3(a)(2) specifies that any person seeking to register as a DCO, any applicant amending its pending application, and any registered DCO seeking to amend its order of registration must submit to the Commission a completed Form DCO, which must include a cover sheet, all applicable exhibits, and any supplemental materials, including amendments thereto, as provided in appendix A to part 39. The Form DCO instructions correspond to this requirement and currently specify that requests for amending a registration order and any associated exhibits must be submitted via Form DCO. The Commission is proposing to change the requirements regarding a DCO’s request to amend an order of registration. First, the Commission proposes to amend § 39.3(a)(2) and Form DCO to eliminate the required use of Form DCO to request an amended order of registration from the Commission. Under current practice, a DCO is permitted to file a request for an amended order with the Commission rather than submitting Form DCO. Commission staff typically will review the request, obtain additional information from the DCO where necessary, and subsequently recommend to the Commission whether to grant or deny the amended order. Given current practice, the Commission believes that an updated Form DCO is not needed to request an amended order of registration. Second, the Commission proposes to amend § 39.3(a)(4) to state that an applicant only needs to file amended exhibits and other information when filing a Form DCO to update a pending application. Consistent with existing Commission practice and the proposal to eliminate the use of Form DCO to request an amended registration order, the Commission is proposing new § 39.3(d) to establish a separate process for such requests. A DCO would be required to provide the Commission with any additional information and documentation necessary to review a request to amend an order of registration. The Commission would issue an amended order if the Commission determines that the DCO would continue to maintain compliance with the Act and the Commission’s regulations after such an amendment. Further, the Commission may also issue an amended order of registration subject to conditions. The Commission also PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 22229 proposes to specify that it may decline to issue an amended order based upon a determination that the DCO would not continue to maintain compliance with the Act and the Commission’s regulations upon such amendment. 4. Dormant Registration—§ 39.3(d) Regulation 39.3(d) establishes the procedure for a dormant DCO to reinstate its registration before it can begin ‘‘listing or relisting’’ products for clearing. The Commission is proposing to replace ‘‘listing or relisting’’ with ‘‘accepting’’ to more accurately describe a DCO’s activities. The Commission also proposes to renumber § 39.3(d) as § 39.3(e). 5. Vacation of Registration—§ 39.3(e) Section 7 of the CEA and § 39.3(e) of the Commission’s regulations permit a DCO to request that the Commission vacate its registration. Orders of vacation of registration issued by the Commission have included requirements based on section 7 of the CEA and other Commission regulations that are not specifically listed in § 39.3(e). The Commission is proposing to amend § 39.3(e) to codify these requirements and provide greater transparency to any DCO that is considering vacating its registration. To implement the proposed changes, the Commission is proposing to renumber current § 39.3(e) as § 39.3(f)(1). Section 7 of the CEA requires any registered entity that wishes to have its registration vacated to make a written request to the Commission. Section 7 also requires that the request be made at least 90 days prior to the date on which the registered entity wants the vacation to take effect. The Commission is proposing to adopt § 39.3(f)(1)(i) to specifically require a DCO to state in its request the date it wishes to have its registration vacated and to make the request at least 90 days prior to that date. The Commission is also proposing to adopt § 39.3(f)(1)(ii) to require a DCO to state in its request how it intends to transfer or otherwise unwind all open positions at the DCO. Under the proposed rule, any actions to transfer or unwind positions would be required to reflect the interests of affected clearing members and their customers. The Commission believes this requirement will help ensure that a DCO that plans to voluntarily cease its clearing activity will do so with minimal disruptions to its members and the markets it serves. The Commission is proposing to adopt § 39.3(f)(1)(iii) and (iv) to require a DCO to continue to maintain its books and records after its registration has E:\FR\FM\16MYP2.SGM 16MYP2 22230 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 6. Request for Transfer of Registration and Open Interest—§ 39.3(f) Regulation 39.3(f) establishes procedures that a DCO must follow to request the transfer of its DCO registration and positions comprising open interest for clearing and settlement, in anticipation of a corporate change. Regulation 39.3(f) also pertains to instances in which a corporate change results in the transfer of all or substantially all of a DCO’s assets to another legal entity. Commission staff has found that the requirements of § 39.3(f) have created confusion for DCOs which merely want to convert the DCO from one type of legal entity to another or change the place of domicile for the DCO’s legal entity without changing the DCO’s operations or transferring the DCO’s registration to new ownership. The Commission also recognizes that a transfer of open interest would not necessarily be tied to a corporate change.17 For example, a DCO may wish to transfer open interest to another DCO that is also a subsidiary of the same parent company, or to another DCO in connection with ceasing its clearing services for a particular product. To separate the procedures for a request to transfer open interest from those procedures to report a change to the DCO’s corporate structure or ownership, the Commission is proposing changes to § 39.3(f), to be renumbered as § 39.3(g), to simplify the requirements for requesting a transfer of open interest and remove references to transfers of registration and requirements regarding corporate changes. Proposed § 39.3(g) would only apply to instances in which a DCO requests to transfer its open interest. Changes to the DCO’s ownership would continue to be addressed under § 39.19(c)(4)(viii) (proposed to be renumbered as § 39.19(c)(4)(ix)). Additionally, as discussed further below, the Commission is proposing to require a DCO to report a change to the legal name under which it operates in proposed § 39.19(c)(4)(xi). The Commission is also proposing conforming changes to § 39.19(c)(4)(ix) to remove cross-references to § 39.3(f). Under the proposed amendments to § 39.3(g), a DCO seeking to transfer its open interest would be required to submit rules for Commission approval pursuant to § 40.5,18 rather than submitting a request for an order at least three months prior to the anticipated transfer. In an effort to simplify the existing requirements, the proposed change would permit the transfer to take effect after a 45-day Commission review period. The 45-day review period would be intended to ensure that clearing members are made aware of the intended transfer and to determine whether the transferee DCO is suitable to take on the transfer 19 and would be 15 To accommodate the proposed changes, the Commission is proposing to include this sentence as part of § 39.3(f)(1). 16 The requirement to send a copy of the notice and order was first included in section 7 in 1922. The Grain Futures Act, Public Law 67–331 ch. 369, sec. 7, 42 Stat. 1002 (1922). Section 7 was most recently amended in 2000, to cover all types of registered entities, including DCOs. Commodity Futures Modernization Act of 2000, Public Law 106–554, Title I, sec. 123(a)(17), 114 Stat. 2763 (2000). 17 The Commission notes, however, that a transfer of open interest in this regard would not be in the context of a default, which would typically involve a DCO transferring positions from one FCM to another FCM. 18 SIDCOs should consider whether the facts and circumstances of the approval sought pursuant to a § 40.5 filing also obligate a SIDCO to file a § 40.10 submission. 19 The Commission notes that, under the existing framework, positions cleared for U.S. customers must be cleared by a registered DCO, while khammond on DSKBBV9HB2PROD with PROPOSALS2 been vacated for the requisite statutory and regulatory retention periods, and to require a DCO to make all such books and records available for inspection by any representative of the Commission or the United States Department of Justice after its registration has been vacated, as set forth in § 1.31 of the Commission’s regulations. The Commission has included this requirement in previous orders of vacation based on § 39.3(f), which states that a vacation of registration ‘‘shall not affect any action taken or to be taken by the Commission based upon actions, activities or events occurring during the time that the entity was registered with the Commission.’’ 15 The Commission is proposing this requirement to further ensure that a DCO does not destroy its books and records in order to hinder or avoid Commission action following the vacation of its registration. Finally, section 7 of the CEA requires the Commission to ‘‘forthwith send a copy’’ of the notice that was filed with the Commission requesting vacation and the order of vacation to all other registered entities. The Commission is proposing to adopt § 39.3(f)(2) to specify that this requirement will be met by posting the required documents on the Commission’s website. This provision was written and amended before the internet expanded to its current form and level of access.16 The Commission believes that posting the required documents on its website is the most effective and efficient way of providing the required information to all registered entities, as well as the public. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 able to continue to operate in compliance with the CEA and the Commission’s regulations. As part of its submission pursuant to § 40.5, the DCO would be required to include: (1) The underlying agreement that governs the transfer; (2) a description of the transfer, including the reason for the transfer and its impact on the rights and obligations of clearing members and market participants holding positions that comprise the DCO’s open interest; (3) a discussion of the transferee’s ability to comply with the CEA, including the DCO Core Principles, and the Commission’s regulations thereunder; (4) the transferee’s rules marked to show changes that would result from acceptance of the transferred positions; (5) a list of products for which the DCO requests transfer of open interest; and (6) a representation by the transferee that it is in and will maintain compliance with the CEA, including the DCO Core Principles, and the Commission’s regulations thereunder upon transfer of the open interest. C. Procedures for Implementing DCO Rules and Clearing New Products 1. Request for Approval of Rules— § 39.4(a) Regulation 39.4(a) specifies that an applicant for registration or a registered DCO may request, pursuant to the procedures set forth in § 40.5, that the Commission approve any or all of its rules prior to their implementation. In practice, the Commission’s review of applications for DCO registration includes review of the applicant’s rules, which are required to be submitted as Exhibit A–2 to Form DCO. The Commission’s issuance of an order of registration as a DCO constitutes an approval of the applicant’s rules that were submitted as part of the application. Accordingly, the Commission is proposing to delete the reference in § 39.4(a) to an applicant for registration, as it is unnecessary for an applicant to separately request approval of its rules. 2. Portfolio Margining—§ 39.4(e) Regulation 39.4(e) establishes certain procedural requirements that apply to a DCO seeking approval for a futures account portfolio margining program. Under § 39.4(e), a DCO seeking to provide a portfolio margining program under which securities would be held in proprietary positions of U.S. persons may be cleared by registered or exempt DCOs. As a result, the Commission would need to ensure that the positions are transferred to an entity that is appropriately registered or exempt from DCO registration. E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules a futures account is required to petition the Commission for an order ‘‘under section 4d of the [CEA].’’ To conform terminology to other provisions in part 39 which distinguish between futures accounts subject to section 4d(a) of the CEA and cleared swaps accounts subject to section 4d(f) of the CEA, the Commission is proposing to substitute ‘‘section 4d(a)’’ for ‘‘section 4d’’ in § 39.4(e). IV. Amendments to Part 39—Subpart B—Compliance With Core Principles khammond on DSKBBV9HB2PROD with PROPOSALS2 A. Compliance With Core Principles— § 39.10 1. Chief Compliance Officer—§ 39.10(c) Regulation 39.10(c)(1)(ii) requires that a DCO’s chief compliance officer (CCO) report to the board of directors or the senior officer of the DCO. The Commission recognizes that a legal entity registered as a DCO may engage in substantial activities not related to clearing, in which case it may be more appropriate for the CCO to report to the senior officer responsible for the DCO’s clearing activities. For example, traditionally, exchanges have had clearing operations as a component of their overall structure. In some instances, the exchange is the same legal entity as the DCO, and therefore, the senior officer of the entity would not necessarily be focused on the clearing operations. In light of this, the Commission is proposing to amend § 39.10(c)(1)(ii) to permit the CCO to report to the senior officer responsible for the DCO’s clearing activities. The Commission also is proposing to amend § 39.10(c)(4)(i) to permit the CCO to submit the annual report (which is discussed below) to the senior officer responsible for the DCO’s clearing activities.20 Regulation 39.10(c)(3)(i) requires the CCO to prepare an annual report that contains a description of the DCO’s written policies and procedures, including the code of ethics and conflict of interest policies. The Commission is proposing to amend this requirement to allow a DCO to incorporate by reference the parts of its most recent CCO annual report containing such description, to the extent that the DCO’s written policies and procedures have not materially changed since they were most recently described in a previously submitted CCO annual report. This is intended to help make the process of 20 Regulation 39.10(c)(3) also requires the CCO to ‘‘provide the annual report to the board of directors or the senior officer.’’ Because this requirement is set forth in greater detail in § 39.10(c)(4)(i), the Commission is proposing to remove, rather than amend, the language in § 39.10(c)(3). VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 preparing the CCO annual report more efficient by not requiring the report to repeat potentially lengthy descriptions of policies and procedures that have already been described in a CCO annual report previously submitted to the Commission. However, to ensure that the descriptions remain current and easily accessible, the Commission is proposing to allow this incorporation by reference only to a CCO annual report submitted to the Commission within the five-year period prior to the date of the CCO annual report containing such incorporation by reference. The Commission believes that this timeframe is appropriate given the record retention requirements of § 39.20. The Commission wishes to stress that this ability to incorporate by reference only applies to descriptions of policies and procedures that have not materially changed and does not apply to the CCO’s assessment of their effectiveness or other requirements outside of § 39.10(c)(3)(i). The Commission also is proposing to amend § 39.10(c)(3)(ii)(A), which requires the CCO to prepare an annual report that reviews each ‘‘core principle and applicable Commission regulation,’’ and with respect to each, identifies the compliance policies and procedures that are designed to ensure compliance ‘‘with the core principle.’’ In order to be consistent with the first part of the requirement, the Commission is proposing to change the language of the second part to ‘‘with each core principle and applicable regulation.’’ The Commission is further proposing to amend § 39.10(c)(3)(ii) to clarify that, for SIDCOs and subpart C DCOs, this includes the Commission’s regulations in subpart C of part 39. In addition, the Commission is further proposing to require that the compliance policies and procedures be identified ‘‘by name, rule number, or other identifier’’ to clarify that this provision is intended to require the CCO annual report to clearly and specifically identify the policies and procedures intended to comply with each core principle and applicable regulation. Finally, § 39.10(c)(4)(i) requires the CCO to provide the annual report to the board of directors or senior officer of the DCO for review prior to submitting it to the Commission. The Commission is proposing to amend the provision to require that this process be described in the annual report, including providing the date on which the report was submitted to the board of directors or senior officer. The Commission notes that § 39.10(c)(4)(i) already requires the submission of the report to the board of directors or senior officer to be recorded PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 22231 in the board of directors’ meeting minutes or otherwise, as evidence of compliance with this requirement. However, the Commission believes that it is reasonable to require similar disclosure in the CCO annual report so that compliance is evident outside the context of an examination of the DCO’s board of directors’ meeting minutes or other records. The Commission notes that some DCOs already describe this process in the cover letter submitted along with the CCO annual report, but the Commission prefers that this description appear in the annual report itself or in an annex, schedule, or exhibit attached to and included with the annual report. The Commission is also proposing to amend § 39.10(c)(4)(ii) by removing the requirement that the CCO annual report be submitted concurrently with the DCO’s fiscal yearend audited financial statement, to be consistent with a proposed change to § 39.19(c)(3)(iv) described below. 2. Enterprise Risk Management— § 39.10(d) The Commission is proposing to add new § 39.10(d) 21 to specifically provide that a DCO is required to have a program of enterprise risk management, which would be defined in § 39.2 as an enterprise-wide strategic business process intended to identify potential events that may affect the enterprise and to manage the probability or impact of those events on the enterprise as a whole, such that the overall risk remains within the enterprise’s risk appetite and provides reasonable assurance that the DCO can continue to achieve its objectives, including compliance with the CEA and 21 The Commission is proposing to place the requirement for an enterprise risk management program in § 39.10, which codifies Core Principle A (pertaining to compliance with the DCO Core Principles generally), to emphasize the broad application of an enterprise risk management program to a DCO’s operations and services. The Commission previously declined to adopt an enterprise risk management requirement applicable to DCOs in a rulemaking pertaining to a specific Core Principle—Core Principle I, ‘‘System Safeguards’’—because such a requirement ‘‘must be addressed in a more comprehensive fashion involving more than the system safeguards context alone, and thus are not appropriate for this rulemaking.’’ See System Safeguards Testing Requirements for Derivatives Clearing Organizations, 81 FR 64322, 64332 (Sept. 19, 2016). Other Commission regulations codify various specific aspects of risk management. For example, § 39.13 codifies Core Principle D, which focuses on market risk and credit risk; § 39.18 codifies Core Principle I, which addresses system safeguards; and § 39.27 codifies Core Principle R, which addresses legal risk. By including the enterprise risk management requirement in § 39.10, the Commission intends to underscore that a properly designed and managed enterprise risk management program covers all risks. E:\FR\FM\16MYP2.SGM 16MYP2 22232 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules Commission regulations. The proposed definition is intended to be applicable to a variety of corporate structures, including stand-alone DCOs, legal entities that are a DCO but also perform other functions (such as a DCM), and corporate groups that consist of a DCO and legally separate but affiliated entities.22 An enterprise risk management program requires an entity to assess all potential risks it faces, including but not limited to systemic, cyber, legal, credit, liquidity, concentration, general business, operational, custody and investment, conduct, financial, reporting, compliance, governance, strategic, and reputational risks. An enterprise risk management program also requires the entity to identify and assess those risks on an enterprise-wide basis, meaning that it must consider whether individual risks across the organization and its affiliates are interrelated and may create a combined exposure to the entity that differs from the sum of the individual risks, and must measure, monitor, and manage such risks accordingly. Additionally, an enterprise risk management program requires an assessment of both the nominal or inherent risk that exists prior to the establishment of any risk mitigation activities (i.e., controls) as well as the residual risk that remains once such mitigation activities or risk responses are taken into account. Existing Commission regulations already require a DCO to manage its risks.23 However, the Commission has found that some DCOs lack a formal enterprise risk management program that addresses their risks on an enterprise-wide basis. Therefore, proposed § 39.10(d)(1) and (2) would require a DCO to implement an enterprise risk management program khammond on DSKBBV9HB2PROD with PROPOSALS2 22 The term ‘‘enterprise-wide’’ is intended to require that the process of identifying, assessing, measuring, monitoring, and managing risk apply to the entire legal entity and its affiliates as a collective whole, with the objective to manage the risks to the DCO. A DCO would satisfy its obligations under paragraph (d)(1) (and paragraphs (d)(2) and (3), as discussed below) if it is part of a corporate group that has in place an enterprise risk management program that includes the DCO within its scope and complies with the requirements of this section. 23 For example, § 39.11(a) requires a DCO to identify and adequately manage its general business risks; § 39.13(a) requires a DCO to ensure that it possesses the ability to manage the risks associated with discharging the responsibilities of the DCO through the use of appropriate tools and procedures; and § 39.13(b) requires a DCO to establish and maintain written policies, procedures, and controls which establish an appropriate risk management framework that, at a minimum, clearly identifies and documents the range of risks to which the DCO is exposed and addresses the monitoring and management of the entirety of those risks. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 and establish and maintain an enterprise risk management framework. Consistent with § 39.10(b), the Commission does not intend to be overly prescriptive by requiring specific standards and methodologies. A DCO should develop an enterprise risk management program that works best for its specific risk exposures, product types, customer base, market segment, and organizational structure, among other things, as long as the program meets the proposed minimum standards and any other legal and regulatory requirements. Therefore, proposed § 39.10(d)(3) would require a DCO to follow generally accepted standards and industry best practices with respect to the development and ongoing monitoring of its enterprise risk management framework, assessment of the performance of the enterprise risk management program, and the management and mitigation of risk to the DCO. The Commission is mindful that best practices evolve and change over time and does not, therefore, wish to prescribe specific standards in its regulations.24 The Commission has observed that some DCOs tend to ‘‘silo’’ responsibility for complying with their statutory and regulatory obligations given the diverse nature of the relevant risks. For example, risk management personnel might be primarily responsible for compliance with Core Principle D, while information technology personnel might be primarily responsible for managing the risks addressed by Core Principle I. To ensure that the enterprise risk management program is managed appropriately, the Commission is proposing § 39.10(d)(4), which would require a DCO to identify as its enterprise risk officer an appropriate individual that exercises the full responsibility and authority to manage 24 In the interests of offering guidance to DCOs, however, the Commission notes that standards similar to those developed by the Committee of Sponsoring Organizations of the Treadway Commission or the International Organization for Standardization are currently among those that would reasonably be considered in the development of an enterprise risk management program. Although different standards may use different terminology for the same concept, these standards have some commonalities, such as the statement of risk appetite and the use of a risk register or logs to record any losses or risks above a given threshold. These standards are noted here to assist DCOs in identifying standards that they may wish to adopt or consider in designing and implementing their risk management frameworks; there may be other internationally-recognized standards that may be used in addition to or instead of the standards mentioned above. In the interests of transparency, a DCO should specify the standards or industry best practices it uses as part of its enterprise risk management program. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 the DCO’s enterprise risk management function.25 The enterprise risk officer would be required to have the authority, independence, resources, expertise, and access to relevant information necessary to fulfil the responsibilities of such position. The Commission believes that the independence of the enterprise risk officer is a critical factor in allowing such officer to operate effectively and has concerns about the potential for senior officers to interfere with the enterprise risk officer’s performance of his or her responsibilities. The Commission requests comment regarding whether the enterprise risk officer should be required to report directly to the board of directors of the organization for which the enterprise risk officer is responsible for managing the risks, whether such organization is the DCO or its corporate parent or other affiliate. The Commission also requests comment as to whether a DCO’s chief risk officer should be permitted to also serve as its enterprise risk officer. B. Financial Resources—§ 39.11 Regulation 39.11 implements Core Principle B, which requires a DCO to possess financial resources that, at a minimum, exceed the total amount that would enable the DCO to meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the DCO in extreme but plausible market conditions and to cover its operating costs for a period of one year, as calculated on a rolling basis. The Commission is proposing to revise or clarify several aspects of § 39.11, including revising the language of § 39.11(a) to make it more consistent with Core Principle B. 1. Calculation of Largest Financial Exposure and Stress Tests— § 39.11(a)(1), (c)(1) and (2). Regulation 39.11(a)(1) requires a DCO to maintain financial resources sufficient to meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the DCO in extreme but plausible market conditions. Regulation 39.11(c)(1) requires a DCO to perform ‘‘stress testing’’ in order to determine the 25 The Commission is proposing to require that the DCO ‘‘identify,’’ rather than ‘‘designate,’’ the enterprise risk officer because, for certain corporate structures, the enterprise risk officer would most appropriately be an officer of a parent or other affiliate of the DCO. As a result, the DCO may not always be the entity that may properly ‘‘designate’’ the enterprise risk officer. E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules financial resources required to satisfy § 39.11(a)(1). As an initial matter, the Commission is proposing to change the wording to ‘‘stress tests’’ to use the term defined in § 39.2. This is not intended to change the meaning of § 39.11(c)(1). Although § 39.11(c)(1) grants a DCO reasonable discretion in determining the methodology used to calculate its financial resources requirement, Commission staff has noted inconsistencies in how DCOs treat excess collateral on deposit when conducting stress tests. These inconsistencies lessen the usefulness of the stress tests. Accordingly, the Commission is proposing additional minimum requirements that a DCO would have to follow in determining its exposure in accordance with § 39.11(c)(1). In particular, the Commission is proposing to add § 39.11(c)(2)(i)(A) 26 to require a DCO to calculate its largest financial exposure net of the clearing member’s required initial margin amount on deposit. In other words, the DCO may not take into account excess collateral on deposit or initial margin required but not yet received. This would focus a DCO’s analysis on the resources that would actually be available to the DCO during times of stress and is consistent with recent guidance issued by CPMI–IOSCO suggesting that when assessing the adequacy of their financial resources, CCPs should take into account only prefunded financial resources and ignore voluntary excess contributions.27 Consistent with this change, the Commission is proposing to remove § 39.11(b)(1)(i), which permits margin to be used to satisfy the requirements of § 39.11(a)(1), because the required initial margin amount on deposit for the clearing member will be applied before determining the largest financial exposure for the DCO in extreme but plausible market conditions. Therefore, the margin would not be available to also cover the exposure. Additionally, the Commission is proposing § 39.11(c)(2)(ii) to require that when stress tests produce losses in both customer and house accounts, a DCO must combine the customer and house stress test losses of each clearing member using the same stress test scenario. Finally, the Commission is proposing several provisions designed to ensure customer funds are treated properly 26 The Commission is proposing to renumber current § 39.11(c)(2) as § 39.11(c)(3). 27 See CPMI–IOSCO, Resilience of central counterparties: Further guidance on the PFMI (July 2017), Principles 4.2.4, 4.2.5, available at https:// www.bis.org/cpmi/publ/d163.pdf. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 when a DCO is calculating its largest financial exposure. Proposed § 39.11(c)(2)(i)(B) would require a DCO to use customer initial margin only to the extent permitted by parts 1 and 22 of the Commission’s regulations. Proposed § 39.11(c)(2)(iii) would clarify that when calculating its largest financial exposure, a DCO may net any gains in the house account with customer losses, if permitted by the DCO’s rules; however, a DCO may not net losses in the house account with gains in the customer account. Proposed § 39.11(c)(2)(iv) would further clarify that, with respect to a clearing member’s cleared swaps customer account, a DCO may net gains for one customer against losses for another customer only to the extent permitted by the DCO’s rules. 2. Assessments—§ 39.11(d)(2) Regulation 39.11(d)(2) sets out certain conditions that apply to a DCO’s use of assessments for additional guaranty fund contributions in calculating the financial resources available to meet its obligations under § 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that the DCO shall only count the value of assessments, after a 30 percent haircut, ‘‘to meet up to 20 percent of those obligations.’’ The Commission has been advised that the phrase ‘‘those obligations,’’ which is a reference to the obligations discussed in the introductory language of § 39.11(d)(2), has created some uncertainty. Therefore, for clarity, the Commission is proposing to replace the phrase ‘‘those obligations’’ with ‘‘the total amount required under paragraph (a)(1) of this section.’’ 3. Liquidity of Financial Resources— § 39.11(e) Regulation 39.11(e)(1)(ii) requires that the financial resources allocated by a DCO to meet the requirements of § 39.11(a)(1) (i.e., its default resources) be sufficiently liquid to enable the DCO to fulfill its obligations as a central counterparty during a one-day settlement cycle. Regulation 39.11(e)(1)(ii) further requires that those resources include cash, U.S. Treasury obligations, or high quality, liquid, general obligations of a sovereign nation (i.e., cash or cash equivalents), in an amount greater than or equal to the average of its clearing members’ average pays over the last fiscal quarter.28 If that 28 The Commission wishes to clarify that the cash, U.S. Treasury obligations, or high quality, liquid, general obligations of a sovereign nation required to be held under § 39.11(e)(1)(ii) do not have to be attributable to the DCO’s own capital but can be attributable to any of the acceptable financial resources included in § 39.11(a)(1). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 22233 amount is less than what a DCO needs to fulfill its obligations during a one-day settlement cycle, § 39.11(e)(1)(iii) permits a DCO to take into account a committed line of credit for the purpose of meeting the remainder of the requirement. The Commission’s intention was to require that at least a portion of a DCO’s default resources be sufficiently liquid to enable the DCO to complete a oneday settlement cycle and that these liquid resources include a certain amount of cash or cash equivalents. Then, if the cash or cash-equivalent amount was not sufficient to meet the total one-day settlement cycle liquidity requirement, a DCO could use a committed line of credit to make up the difference.29 Regulation 39.11(b)(1), however, which sets forth the types of financial resources that can be considered as default resources, does not expressly permit the use of a committed line of credit; 30 it does permit the use of ‘‘[a]ny other financial resource deemed acceptable by the Commission.’’ The result is that § 39.11(b)(1) only permits a DCO to use a committed line of credit as part of its default resources if ‘‘deemed acceptable by the Commission,’’ while § 39.11(e)(1)(iii) seems to permit a DCO to use a committed line of credit as part of its default resources up to the amount needed to satisfy the ‘‘one-day settlement cycle’’ liquidity requirement after cash or cash equivalents have been applied. Accordingly, the Commission is proposing § 39.11(e)(3) to clarify that a committed line of credit or similar facility is a permitted default resource up to the amount provided for in § 39.11(e)(1)(ii), provided, however, that it is not counted twice to meet the requirements of § 39.11(e)(1)(ii) and § 39.11(e)(2).31 The Commission is also proposing clarifying changes to the text of § 39.11(e)(1)(iii) and (e)(2). In addition, the Commission is proposing to change references to ‘‘daily settlement pay’’ in § 39.11(e)(1)(ii) to ‘‘daily settlement variation pay’’ in order to clarify that additional calls for 29 See Financial Resources Requirements for Derivatives Clearing Organizations, 75 FR 63113, 63116 (Oct. 14, 2010) (proposed rule). 30 In the notice of proposed rulemaking for § 39.11, the Commission noted that a committed line of credit or similar facility is not listed as a financial resource available to a DCO to satisfy the requirements of § 39.11(a)(1) and (2). The Commission further noted that a DCO may use a committed line of credit or similar facility only to meet the liquidity requirements set forth in § 39.11(e)(1) and (2). Id. See also Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69350 (affirming this approach). 31 The Commission is proposing to renumber current § 39.11(e)(3) as § 39.11(e)(4). E:\FR\FM\16MYP2.SGM 16MYP2 22234 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules initial margin should not be included in the calculation. khammond on DSKBBV9HB2PROD with PROPOSALS2 4. Reporting Requirements—§ 39.11(f) Regulation 39.11(f) sets forth reporting requirements for DCOs concerning the financial resources they are required to maintain pursuant to § 39.11(a). After § 39.11(f) was adopted, the Commission adopted §§ 39.33(a) and 39.39(d), which set forth financial resources requirements for SIDCOs and subpart C DCOs, and financial resources requirements for the recovery and winddown plans of SIDCOs and subpart C DCOs, respectively. The Commission is proposing to amend several provisions of § 39.11(f) by adding the words ‘‘and §§ 39.33(a) and 39.39(d), if applicable,’’ to clarify that financial resources reporting by SIDCOs and subpart C DCOs should encompass all financial resources requirements applicable to them under part 39. 5. Financial Statements—§ 39.11(f)(1)(ii) Regulation 39.11(f)(1)(ii) requires a DCO to file with the Commission each fiscal quarter, or at any time upon Commission request, a financial statement, including the balance sheet, income statement, and statement of cash flows, of the DCO or of its parent company. Since § 39.11(f)(1)(ii) was implemented, some DCOs have filed the financial statements of their parent companies. Because some of these DCOs are part of a complex corporate structure, Commission staff has had difficulty determining whether the entity covered by a particular financial statement is the true, direct parent of the relevant DCO, which, in turn, makes it difficult to accurately assess the financial strength of the DCO. Therefore, the Commission is proposing to revise § 39.11(f)(1)(ii) to require that the financial statement provided be that of the DCO and not the parent company. In further regard to § 39.11(f)(1)(ii), the Commission has received many inquiries concerning the accounting standards that apply to the preparation of the DCO’s financial statements. Generally, Commission regulations require financial statements to be prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).32 Therefore, the Commission would expect DCOs to provide financial statements prepared in accordance with U.S. GAAP. However, the Commission recognizes that DCOs organized outside the United States may prepare their financial statements in accordance with International Financial 32 See, e.g., §§ 1.10(d)(3), 4.22(d), and 38.1101(b)(1). VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), or pursuant to other country-specific accounting standards. The Commission has permitted commodity pool operators to file commodity pool financial statements prepared in accordance with IFRS if the pool is organized under the laws of a foreign jurisdiction, and certain other conditions are met.33 The Commission notes that the Securities and Exchange Commission (SEC) has adopted financial reporting requirements for securities clearing agencies that require U.S. GAAP, but permit the use of IFRS by clearing agencies that are ‘‘incorporated or organized under the laws of any foreign country.’’ 34 The SEC stated in its adopting release that it also recognizes the ‘‘advantages of financial statement disclosure that are limited to more widely applied bases of accounting and may offer more utility to market participants, regulators, and other stakeholders of clearing agencies.’’ 35 Therefore, it limited the different bases of accounting upon which annual audited financial statements may be prepared to IFRS and U.S. GAAP.36 The Commission therefore is proposing to revise § 39.11(f)(1)(ii) to clarify that the financial statement must be prepared in accordance with U.S. GAAP for DCOs incorporated or organized under U.S. law, and in accordance with either U.S. GAAP or IFRS issued by the IASB for DCOs incorporated or organized under the laws of any foreign country. In reviewing DCOs’ financial statements, Commission staff has noted that assets allocated by the DCO to meet the requirements of § 39.11(a)(1) or (2) often are not identified accordingly. The Commission therefore is proposing in § 39.11(f)(1)(ii) and (f)(2)(i) (discussed below) to require that assets allocated by the DCO for such purpose must be clearly identified on the DCO’s balance sheet as held for that purpose. In addition, the Commission is proposing to renumber current § 39.11(f)(2) as § 39.11(f)(1)(iv) and amend it to incorporate the language of current § 39.11(f)(4), which requires a DCO to submit its quarterly financial report no later than 17 business days after the end of the DCO’s fiscal quarter or at a later time as permitted by the Commission in its discretion in 33 See § 4.22(d)(2). CFR 240.17Ad–22(c)(2)(ii). 35 Clearing Agency Standards, 77 FR 66220, 66244 (Nov. 2, 2012) (final rule). 36 See id. 34 17 PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 response to a DCO’s request for an extension. 6. Annual Reporting—§ 39.11(f)(2) The Commission is proposing to revise § 39.11(f)(2) to set forth a DCO’s annual financial reporting requirements (currently set forth in § 39.19(c)(3)(ii), which would also be revised) in the same way § 39.11(f)(1) sets forth a DCO’s quarterly financial reporting requirements (which are crossreferenced in § 39.19(c)(2)). In addition to its audited year-end financial statement, a DCO would be required to submit: (1) A reconciliation, including appropriate explanations, of its balance sheet when material differences exist between it and the balance sheet in the DCO’s financial statement for the last quarter of the fiscal year or, if no material differences exist, a statement so indicating, and (2) such further information as may be necessary to make the statements not misleading. Commission staff has encountered situations in which significant discrepancies exist between a DCO’s financial statements for the last quarter of its fiscal year and its audited year-end financial statement. There is often a simple explanation for this, e.g., the discrepancies reflect a material change in a given foreign exchange rate. The Commission believes a reconciliation will help explain these discrepancies and will aid its review of the DCO’s financial statements. 7. Documentation Requirements— § 39.11(f)(3) Current § 39.11(f)(3) requires a DCO to provide to the Commission certain documentation related to its quarterly financial reporting.37 The Commission has determined that requiring this documentation each quarter is unnecessary where there is no change from the prior submission. Therefore, the Commission is proposing to revise § 39.11(f)(3) to clarify that a DCO must send the documentation to the Commission required under current paragraphs (f)(3)(i) and (ii) (proposed to be renumbered as paragraphs (f)(3)(i)(A) and (i)(B)) only upon the DCO’s first submission under § 39.11(f)(1) and in the event of any change thereafter. The Commission also is proposing to renumber § 39.11(f)(3)(iii), which concerns providing copies of agreements establishing or amending a credit facility, insurance coverage, or other arrangement, as § 39.11(f)(3)(ii), 37 The documentation explains (1) the methodology used to compute financial resources requirements, and (2) the basis for the DCO’s determinations regarding valuation and liquidity requirements. E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules and add language specifying that copies of the agreements should evidence or support the DCO’s ability to meet applicable financial resources and liquidity resources requirements. 8. Certification—§ 39.11(f)(4) After § 39.11 was adopted, the Division advised DCOs that the quarterly financial report required under paragraph (f) should be accompanied by a certification as to the accuracy of the report signed by the person responsible for the accuracy and completeness of the report.38 Such certification is required for submission of annual chief compliance officer reports and Form 1–FR by FCMs, and is also appropriate in these circumstances.39 The Commission is proposing to amend § 39.11(f)(4) to add this new requirement. C. Participant and Product Eligibility— § 39.12 khammond on DSKBBV9HB2PROD with PROPOSALS2 Regulation 39.12 implements Core Principle C, which requires a DCO to establish admission and continuing eligibility standards for its members, as well as standards for determining the eligibility of agreements, contracts, or transactions submitted to the DCO for clearing. Several provisions in § 39.12 require a DCO to ‘‘adopt’’ or ‘‘establish’’ rules. The Commission is proposing to amend those provisions to require a DCO to ‘‘have’’ rules.40 Regulation 39.12(b)(2) provides that a DCO shall adopt rules providing that all swaps with the same terms and conditions are economically equivalent within the DCO. The Commission recognizes that some DCOs do not clear swaps and it was not the intention of the Commission to require DCOs that do not clear swaps to adopt the rules required under this provision. Therefore, the Commission is proposing to revise § 39.12(b)(2) so that it explicitly applies only to DCOs that clear swaps. 38 Memorandum to All Registered DCOs from Ananda Radhakrishnan, Director, Division of Clearing and Risk, June 7, 2012. 39 See 17 CFR 39.10(c)(4)(ii) (requiring certification of annual reports by chief compliance officers); 17 CFR 1.10(d)(4) (requiring certification of financial reports submitted by FCMs and introducing brokers); see also 17 CFR 4.22(h) (requiring commodity pool operators to certify periodic and annual financial reports); 17 CFR 4.27(e)(1) (requiring commodity pool operators and commodity trading advisors to certify periodic reports). 40 The Commission is also proposing to renumber paragraphs (a)(5)(i)(A) and (B) and (a)(5)(ii) of § 39.12(a)(5) as paragraphs (a)(5)(ii), (iii), and (iv), respectively. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 D. Risk Management—§ 39.13 Regulation 39.13 implements Core Principle D, which establishes risk management standards for DCOs. The Commission is proposing to clarify several aspects of § 39.13. 1. Risk Management Framework— § 39.13(b) Regulation 39.13(b) requires a DCO to establish and maintain written policies, procedures, and controls, approved by its board of directors, which establish an appropriate risk management framework. The introductory heading to this provision states that it is a ‘‘[d]ocumentation requirement.’’ The Commission is proposing to replace ‘‘[d]ocumentation requirement’’ with ‘‘[r]isk management framework’’ and is also proposing to replace the words ‘‘establish and maintain’’ with ‘‘have and implement’’ to make it clear that a DCO is not only required to have a documented risk management framework but to put it into action. 2. Limitation of Exposure to Potential Default Losses—§ 39.13(f) Regulation 39.13(f) requires a DCO to limit its exposure to potential losses from clearing member defaults to ‘‘ensure’’ that the DCO’s operations would not be disrupted and nondefaulting clearing members would not be exposed to unanticipated or uncontrollable losses. The Commission recognizes that a DCO cannot ensure protection from that which it cannot anticipate. Therefore, the Commission is proposing to replace ‘‘ensure’’ with ‘‘minimize the risk’’ and make conforming changes to paragraphs (f)(1) and (2) of § 39.13. 3. Margin Requirements—§ 39.13(g) a. Methodology and Coverage— § 39.13(g)(2) Regulation 39.13(g)(2)(i) requires that a DCO have initial margin requirements that are commensurate with the risks of each product and portfolio, including any unusual characteristics of, or risks associated with, particular products or portfolios. The regulation currently notes that such risks ‘‘include[ ] but [are] not limited to jump-to-default risk or similar jump risk.’’ The Commission is proposing to amend § 39.13(g)(2)(i) to note that such risks also include ‘‘concentration of positions.’’ Recent events, including a significant loss from a default at a central counterparty outside of the Commission’s jurisdiction, highlight the importance of addressing those risks. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 22235 b. Independent Validation—§ 39.13(g)(3) Regulation 39.13(g)(3) requires that a DCO’s systems for generating initial margin requirements, including its theoretical models, be reviewed and validated by a qualified and independent party on a regular basis. The provision further provides that the validation may be conducted by independent contractors or employees of the DCO, as long as they are not responsible for the development or operation of the systems and models being tested. The Commission is proposing to amend this provision to specify that ‘‘on a regular basis’’ means annually and to also permit employees of an affiliate of the DCO to conduct the validations. Based on experience since the provision was adopted, the Commission believes an annual validation is sufficient. The Commission also believes it is appropriate to permit employees of an affiliate of the DCO to conduct the validations because, as with independent contractors or employees of the DCO, the main concern is that they not be persons responsible for development or operation of the systems and models being tested. c. Spreads and Portfolio Margins— § 39.13(g)(4) The Commission is amending § 39.13(g)(4) to substitute the phrase ‘‘conceptual basis’’ for the phrase ‘‘theoretical basis’’ in the discussion of spread margin. This change would not alter the meaning of the rule but would simply make the terminology consistent with that used in the other Commission regulations.41 d. Back Tests—§ 39.13(g)(7) The Commission is proposing new § 39.13(g)(7)(iii) to clarify that, in conducting back tests of initial margin requirements, a DCO should compare portfolio losses only to those components of initial margin that capture changes in market risk factors. e. Gross Customer Margin— § 39.13(g)(8)(i) Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin on a gross basis for each clearing member’s customer account(s). After the regulation was adopted, Division staff received several inquiries regarding whether the provision applied to intraday settlements as well as end-ofday settlements. In response, the Division advised DCOs that the provision requires a DCO to collect 41 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636, 658 (Jan. 6, 2016). E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22236 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules customer initial margin on a gross basis during any settlement cycle (end-of-day or intraday) in which the DCO collects customer initial margin. The Division also asked DCOs to notify the Division, in writing, of any issues that could prevent a DCO from fully complying with this requirement.42 Although § 39.13(g)(8)(i) does not differentiate between end-of-day and intraday collections of customer initial margin, there are significant operational issues that may affect the ability of clearing members to accurately determine the positions of individual customers on an intraday basis with respect to certain types of transactions (e.g., transfers, give-ups, and allocations of block orders) and with respect to certain types of market participants (e.g., locals and high frequency traders). Therefore, intraday gross margin calculations may result in some clearing members being charged too much margin and others being charged too little margin, which could necessitate significant end-of-day adjustments. Regulation 39.13(g)(8)(i) is premised upon the ability of a DCO to accurately determine the initial margin amounts that would be required for each individual customer if each individual customer were a clearing member. Accordingly, the Commission is proposing to amend § 39.13(g)(8)(i) to require a DCO to collect customer initial margin from its clearing members on a gross basis only during its end-of-day settlement cycle, in light of the operational issues that may arise intraday. However, the Commission strongly encourages DCOs to collect customer initial margin from their clearing members on a gross basis during any intraday settlement cycle in which the DCOs collect customer initial margin, if they are able to calculate the margin accurately. The Commission requests comment as to whether this is the correct approach or whether there are other alternatives that would address the collection of intraday gross margin. Currently, § 39.13(g)(8)(i)(B) provides that for purposes of calculating the gross initial margin requirement for clearing members’ customer accounts, to the extent not inconsistent with other Commission regulations, a DCO may require its clearing members to report the gross positions of each individual customer to the DCO, or it may permit each clearing member to report the sum of the gross positions of its customers to the DCO. Regulation 39.13(g)(8)(i)(C) 42 Memorandum to All Registered DCOs from Ananda Radhakrishnan, Director, Division of Clearing and Risk, July 19, 2012. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 further provides that for purposes of paragraph (g)(8), a DCO may rely, and may permit its clearing members to rely, upon the sum of the gross positions reported to the clearing members by each domestic or foreign omnibus account that they carry, without obtaining information identifying the positions of each individual customer underlying such omnibus accounts. In addition, § 39.19(c)(5)(iii) currently requires a DCO to file with the Commission, for each customer origin of each clearing member, the end-of-day gross positions of each beneficial owner, upon Commission request. The Commission believes the ability to analyze positions at the customer level is a crucial element of an effective risk surveillance program. For example, a clearing member account that is composed of 1,000 customers each holding one contract poses substantially less financial risk to the clearing member and to the DCO than a clearing member account composed of one customer holding 1,000 contracts. The ability to identify those customers whose positions create the most risk to a DCO’s clearing members would assist the Commission in determining whether adequate measures are in place to address those risks and whether the Commission needs to take proactive steps to see that those risks are mitigated. When the part 39 regulations were adopted, the Commission determined to allow a DCO to permit its clearing members to report the sum of the gross positions of their customers to the DCO without obtaining information identifying the positions of each individual customer underlying such clearing members’ omnibus accounts. The Commission also determined not to require routine reporting of end-of-day gross positions of each beneficial owner to the Commission, in part because of concerns about the difficulty that DCOs would have in obtaining this information.43 Subsequently, however, the Commission adopted § 22.11(c), which requires FCMs to report customer information about swaps to DCOs.44 Thus, for swaps, DCOs now have data that they did not have fully available to them at the time part 39 was adopted. Moreover, the Commission has established a reporting protocol for this 43 Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69375, 69400. 44 Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336, 6376 (Feb. 7, 2012) (codified at 17 CFR 22). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 data, which can be used for submitting futures data as well. To avoid a potential regulatory gap, the Commission is proposing to require a DCO to have rules requiring its clearing members to report customer information about futures (as well as swaps) to DCOs. This will enable DCOs, in turn, to report this information to the Commission, as discussed further below with respect to the proposed amendment to § 39.19(c)(1)(i)(D). Specifically, the proposed amendments to § 39.13(g)(8)(i)(B) would require a DCO to have rules that require its clearing members to provide reports to the DCO each day setting forth end-ofday gross positions of each beneficial owner within each customer origin of the clearing member.45 f. Customer Initial Margin Requirements—§ 39.13(g)(8)(ii) Regulation 39.13(g)(8)(ii) provides that a DCO must require its clearing members to collect customer initial margin from their customers, ‘‘for nonhedge positions, at a level that is greater than 100 percent of the [DCO]’s initial margin requirements with respect to each product and swap portfolio.’’ Historically, DCMs had set customer initial margin requirements for their FCM members,46 and the Commission stated that this provision simply shifts the responsibility for establishing customer initial margin requirements from DCMs to DCOs.47 The Commission also noted its belief that requiring an FCM to collect higher customer initial margin for ‘‘non-hedge positions’’ provides a valuable cushion of readily available customer margin collateral.48 After § 39.13(g)(8)(ii) was adopted, the Division issued interpretative guidance addressing several aspects of the regulation in response to a request from Chicago Mercantile Exchange, Inc. (CME), a registered DCO.49 The Commission is proposing to amend § 39.13(g)(8)(ii) in a manner consistent 45 In this regard, the Commission is also proposing to amend § 39.13(g)(8)(i)(B) by changing ‘‘may’’ to ‘‘shall,’’ deleting ‘‘to the extent not inconsistent with other Commission regulations’’ and ‘‘or it may permit each clearing member to report the sum of the gross positions of its customers to the derivatives clearing organization,’’ deleting paragraph (C), and renumbering paragraphs (D) and (E). 46 The Commission is proposing to amend § 39.13(g)(8)(ii) and (iii) to clarify that these provisions apply to FCM clearing members only. 47 Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69377. 48 Id. at 69378. 49 CFTC Letter No. 12–08 (Sept. 14, 2012); see also Letter from Lisa Dunsky, Executive Director and Associate General Counsel, Chicago Mercantile Exchange Inc., to Ananda Radhakrishnan, Director, Division of Clearing and Risk (Aug. 29, 2012). E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules with the interpretative guidance provided in the Division’s letter, as discussed further below. In its request, CME asked for clarification as to the meaning of the term ‘‘non-hedge positions.’’ CME explained that DCM requirements for collection of higher customer initial margin had been applied historically on an account, rather than a position, basis. Under existing rules or practices at various DCMs, exchange members, market makers, market professionals, and certain other categories of customers had been subject to the clearing initial margin requirement; i.e., such exchange member accounts were designated as ‘‘hedge’’ or ‘‘member,’’ and by virtue of this designation, received the lower clearing initial margin rate, even though there may have been speculative positions in the accounts. CME also inquired as to the applicability of § 39.13(g)(8)(ii) to nonclearing FCM customer omnibus accounts at clearing FCMs. CME stated that a non-clearing FCM’s customer omnibus account may be comprised of both hedge accounts and speculative accounts, and the clearing FCM typically did not know the identity of the underlying customers in a nonclearing FCM’s omnibus account. The non-clearing FCM sets customer initial margin requirements based on whether a customer account is designated as ‘‘hedge’’ or ‘‘speculative.’’ Thus, a speculative account included within an omnibus account already would have been assessed the higher customer initial margin requirement by such customer’s non-clearing FCM. If the clearing FCM were required to apply the higher customer initial margin rate to the entire customer omnibus account, this would require the non-clearing FCM to either (1) post more collateral with the clearing FCM than the amount actually collected from its hedge customers in the omnibus account, or (2) collect the higher customer initial margin requirement from its hedge customers so that it could post this collateral with the clearing FCM. In its response to CME’s request, the Division stated that it interprets § 39.13(g)(8)(ii) ‘‘in a manner that preserves the historical customer margining practices applicable to FCMs . . . [noting that] FCMs are expected to continue the practice of collecting customer initial margin at a level higher than the minimum required, if such action is warranted based on the unique risk profile of an individual customer.’’ The Commission agrees with such interpretation and accordingly, is proposing to revise § 39.13(g)(8)(ii) to VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 permit DCOs to continue the practice of establishing customer initial margin requirements based on the type of customer account and by applying prudential standards that result in FCMs collecting customer initial margin at levels commensurate with the risk presented by each customer account. The Commission therefore proposes to amend § 39.13(g)(8)(ii) by deleting the reference to ‘‘non-hedge’’ positions, changing the reference to ‘‘a level that is greater than 100 percent’’ to ‘‘a level that is not less than 100 percent,’’ clarifying that the customer initial margin level is measured against ‘‘clearing’’ initial margin requirements, and explicitly stating that customer initial margin levels must be ‘‘commensurate with the risk presented by each customer account.’’ The Commission believes that establishing a bright-line test to determine the appropriate percentage by which customer initial margin requirements must exceed clearing initial margin requirements with respect to any particular types of customer accounts is inappropriate because the circumstances for each DCO and the nature of its clearing members and their customers vary. In adopting § 39.13(g)(8)(ii), the Commission noted that the percentage ‘‘should be based on the nature and volatility patterns of the particular product or swap portfolio, and the DCO’s related evaluation of the potential risks posed by customers in general to their clearing members and, in turn, the potential risks posed by such clearing members in general to the DCO, rather than the creditworthiness of particular customers.’’ 50 The Commission requests comment as to whether it should add standards or further direction in § 39.13(g)(8)(ii), or provide guidance to further clarify what would be considered ‘‘commensurate with the risk presented,’’ similar to the Commission’s statement in the adopting release noted above. The Commission is proposing to amend the language in § 39.13(g)(8)(ii) that gives the DCO reasonable discretion in determining the percentage by which customer initial margin requirements must exceed the DCO’s clearing initial margin requirements with respect to particular products or portfolios, by replacing ‘‘the percentage by which’’ with ‘‘whether and by how much.’’ However, the proposed amendments to § 39.13(g)(8)(ii) would give the Commission the ability to require different customer initial margin levels if the Commission deems the levels 50 Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69378. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 22237 insufficient to protect the financial integrity of the DCO or its clearing members. Since the adoption of § 39.13(g)(8)(ii), DCOs have typically added a 10 percent increase to the clearing initial margin requirement to set the higher customer initial margin requirement. The Commission has generally found this to be adequate in ordinary market conditions. g. Haircuts—§ 39.13(g)(12) Regulation 39.13(g)(12) requires a DCO to apply appropriate reductions in value to reflect credit, market, and liquidity risks (haircuts), to the assets that it accepts in satisfaction of initial margin obligations. This provision also requires a DCO to evaluate the appropriateness of the haircuts ‘‘on at least a quarterly basis.’’ Regulation 39.11(d)(1) requires that haircuts be evaluated on a monthly basis for assets that are used to meet the DCO’s financial resources obligations set forth in § 39.11(a). The Commission is proposing to amend § 39.13(g)(12) to align it with § 39.11(d)(1) by requiring that DCOs evaluate the appropriateness of the haircuts that they apply to assets accepted in satisfaction of initial margin obligations on a monthly basis. Given that initial margin is held for risk management purposes, and the value of these assets change frequently, the Commission believes it would be more appropriate to assess haircuts more frequently. 4. Other Risk Control Mechanisms— § 39.13(h) a. Risk Limits—§ 39.13(h)(1) Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on each clearing member, by house origin and by each customer origin, in order to prevent a clearing member from carrying positions for which the risk exposure exceeds a specified threshold relative to the clearing member’s and/or the DCO’s financial resources. The Commission is proposing to clarify that such risk limits should also be imposed to address positions that may be difficult to liquidate. This might be the case, for example, in instances where a position in a particular contract or swap is concentrated with a particular member, such that there is reason to doubt whether, in the event that this member defaults, other members would be willing and able to accept, collectively, the entirety of that position or swap. As noted above, in section IV.D.3.a, recent events highlight the importance of imposing risk limits to address positions that may be difficult E:\FR\FM\16MYP2.SGM 16MYP2 22238 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules to liquidate, particularly concentrated positions. b. Clearing Members’ Risk Management Policies and Procedures—§ 39.13(h)(5) Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis, review the risk management policies, procedures, and practices of each of its clearing members, which address the risks that such clearing members may pose to the DCO, and to document such reviews. The Commission is proposing to clarify that DCOs should, having conducted such reviews, ‘‘take appropriate actions to address concerns identified in such reviews,’’ and that the documentation of the reviews should include ‘‘the basis for determining what action was appropriate to take.’’ The Commission notes that, where a DCO is required to conduct any type of review under Commission regulations, similar remediation and documentation is expected. Absent such follow-up, the reviews would lack purpose. khammond on DSKBBV9HB2PROD with PROPOSALS2 5. Cross-Margining Arrangements— § 39.13(i) A cross-margining arrangement allows a DCO to provide offsets or reductions in required margin between products that it and another DCO (or other clearing organization) clear if the risk of one product is significantly and reliably correlated with the risk of the other product. The Commission approved the first cross-margining arrangement in 1988, and it has approved many such arrangements since.51 Proposed 51 The Commission has issued a number of crossmargining program orders, including, but not limited to: A June 1, 1988 order approving a proprietary cross-margining system between the Intermarket Clearing Corporation (ICC) and Options Clearing Corporation (OCC), as expanded by a November 26, 1991 order approving the addition of cross-margining of positions of market professionals in non-proprietary accounts of participating clearing members to the ICC/OCC cross-margining program, 56 FR 61406 (Comm. F. T. Comm’n Dec. 3, 1991), and as further amended by a January 22, 1996 order to incorporate the provisions of appendix B, Framework 1 to the Commission’s part 190 Regulations; a September 26, 1989 order approving a proprietary cross-margining system between OCC and CME, as expanded by a November 26, 1991 order approving the addition of cross-margining of positions of market professionals in non-proprietary accounts of participating clearing members to the OCC/CME cross-margining program, 56 FR 61404 (Comm. F. T. Comm’n Dec. 3, 1991); a June 2, 1993 order approving the proposals of CME and ICC to implement a tri-lateral cross-margining program with OCC, as further amended by a January 22, 1996 amended order to reflect the approval of proposed changes to the CME/ICC/OCC cross-margining amendments for proprietary and market professional accounts to incorporate the provisions of appendix B, Framework 1 to the Commission’s part 190 Regulations; a November 5, 2004 order approving the establishment of an internal cross-margining program that permits cross-margining of positions of market professionals in internal non-proprietary VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 § 39.13(i) would codify the Commission’s existing practices for evaluating cross-margining arrangements.52 In evaluating cross-margining arrangements, the Commission reviews: (1) The methodology to be used to calculate margin requirements for the positions subject to the cross-margining arrangement; (2) the correlation between the positions, including the stability of the relationship among the eligible products and the potential impact a change in the correlation could have on setting margin requirements; (3) the impact on the settlement process; and (4) the application of default procedures, including any loss-sharing arrangements, pursuant to the proposed arrangement. If only one of the clearing organizations participating in the arrangement is a registered DCO, the Commission looks at additional factors, including the other clearing organization’s status with and oversight by other regulator(s). Also, if one of the clearing organizations is organized outside of the United States, the Commission evaluates the bankruptcy treatment in that clearing organization’s jurisdiction. Finally, the Commission considers the impact of the crossmargining arrangement, if any, on the DCO’s ability to comply with the DCO Core Principles, particularly those concerning financial resources and risk management. The Commission requests comment as to whether there are other factors the Commission should consider and, therefore, other information that it should request. The Commission is proposing to require a DCO to provide the relevant information needed to facilitate its review as part of a rule filing submitted for Commission accounts of OCC clearing members; and a February 29, 2008 order approving the establishment of a non-proprietary cross-margining agreement between the OCC and ICE Clear US, Inc. The Commission has also allowed cross-margining programs into effect without Commission approval including, but not limited to, a proprietary cross-margining program between CME and the London Clearing House (allowed into effect without approval on March 23, 2000). 52 In February 2015, CPMI–IOSCO issued a Level 2 assessment report on implementation of the PFMIs by CCPs and trade repositories in the U.S. (Implementation Report). See CPMI–IOSCO, Implementation monitoring of PFMIs: Level 2 assessment report for central counterparties and trade repositories—United States (Feb. 2015), available at http://www.bis.org/cpmi/publ/d126.pdf. The Implementation Report noted that Commission regulations do not explicitly address crossmargining, and in particular, the risk management requirements necessary where two or more CCPs participate in cross-margining arrangements. The Commission notes that existing DCO Core Principles and regulations regarding risk management, treatment of customer funds, default and settlement procedures, taken as a whole, address cross-margining arrangements. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 approval pursuant to § 40.5. The Commission requests comment as to whether this would be the appropriate process or whether a more or less detailed review process is appropriate given the factors and risks involved. E. Treatment of Funds—§ 39.15 Regulation 39.15 implements Core Principle F, which requires a DCO to establish standards and procedures designed to protect its clearing members’ funds, hold such funds in a manner that would minimize the risk of loss or delay in the DCO’s access, and invest such funds in instruments with minimal credit, market, and liquidity risks. The Commission is proposing to amend certain aspects of § 39.15. 1. Segregation of Customer Funds— § 39.15(b)(1) Regulation 39.15(b)(1) requires a DCO to comply with the applicable segregation requirements of section 4d of the CEA and Commission regulations thereunder, or any other applicable Commission regulation or order requiring that customer ‘‘funds and assets’’ be segregated, set aside, or held in a separate account. Section 4d of the CEA refers to customer ‘‘money, securities and property.’’ Therefore, the Commission is proposing to amend § 39.15(b) to clarify that ‘‘funds and assets’’ are equivalent to ‘‘money, securities, and property’’ in order to better align the language of the regulation with the language in the statute. 2. Commingling in Cleared Swaps Customer Account—§ 39.15(b)(2)(i) Regulation 39.15(b)(2)(i) requires a DCO to file rules for Commission approval pursuant to § 40.5 in order for the DCO and its clearing members to commingle customer positions in futures, options, and swaps, and any money, securities, or property received to margin, guarantee or secure such positions, in an account subject to the requirements of section 4d(f) of the CEA (i.e., the cleared swaps customer account). The Commission is proposing to revise § 39.15(b)(2)(i) to clarify that a DCO that wants to commingle foreign futures and foreign options with swaps must meet the same requirements. 3. Commingling in Futures Customer Account—§ 39.15(b)(2)(ii) Regulation 39.15(b)(2)(ii) requires a DCO to file a petition for an order pursuant to section 4d(a) of the CEA in order for the DCO and its clearing members to commingle customer positions in futures, options, and swaps, and any money, securities, or property E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules received to margin, guarantee or secure such positions, in an account subject to the requirements of section 4d(a) of the CEA. The Commission is proposing to revise § 39.15(b)(2)(ii) to clarify that a DCO that wants to commingle foreign futures and foreign options with futures and options must meet the same requirements as a DCO that wants to commingle swaps with futures and options. Further, when § 39.15(b)(2)(ii) was first promulgated, the Commission, in reference to its decision to require an order rather than a rule approval to commingle cleared swaps with futures in a futures account, stated ‘‘at this time, it is appropriate to provide these additional procedural protections before exposing futures customers to the risks of swaps that may be commingled in a futures account.’’ 53 The Commission, however, acknowledged that ‘‘as the Commission and the industry gain more experience with cleared swaps, the Commission may revisit this issue in the future.’’ 54 The Commission now believes that a request for a rule approval that complies with § 40.5 will provide the Commission with sufficient means to determine whether customer funds held in a futures account will be adequately protected if cleared swaps, foreign futures, or foreign options are also held in the account. Therefore, the Commission is proposing to revise § 39.15(b)(2)(ii) to require a DCO to file rules for Commission approval pursuant to § 40.5 in order for the DCO and its clearing members to commingle swaps, foreign futures, or foreign options with futures and options in an account subject to the requirements of section 4d(a) of the CEA. khammond on DSKBBV9HB2PROD with PROPOSALS2 4. Commission Action—§ 39.15(b)(2)(iii) Regulation 39.15(b)(2)(iii) provides that the Commission may ‘‘grant approval of’’ a rule submission filed under § 39.15(b)(2)(i) in accordance with § 40.5. The Commission is proposing to replace the words ‘‘grant approval of’’ with ‘‘approve’’ in order to be consistent with the language used in § 40.5(b). Further, the Commission is proposing to amend § 39.15(b)(2)(iii) to reflect the proposed changes to § 39.15(b)(2)(ii). Specifically, the Commission is proposing to eliminate § 39.15(b)(2)(iii)(A) and (B) and include the content of both paragraphs within § 39.15(b)(2)(iii). 53 Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69392. 54 Id. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 5. Transfer of Customer Positions— § 39.15(d) Regulation 39.15(d) requires a DCO to have rules providing for the prompt transfer of all or a portion of a customer’s portfolio of positions and related funds at the same time from the carrying clearing member to another clearing member, without requiring the close-out and re-booking of the positions prior to the requested transfer. Some DCOs have noted that, although a DCO may transfer positions from one clearing member to another, the DCO does not generally transfer funds. The DCO simply adjusts the amount of margin due from, or owed to, each clearing member during the next collection cycle. Moreover, the receiving clearing member may not owe additional funds if it has sufficient excess margin funds on deposit at the DCO. The DCO may only transfer funds if it has already collected variation margin from the transferring clearing member and positions were transferred at the trade price. In addition, any excess margin held by the transferring clearing member would be transferred to the receiving clearing member. Accordingly, the Commission is proposing to amend § 39.15(d) to delete the words ‘‘at the same time,’’ thus requiring the ‘‘prompt,’’ but not necessarily simultaneous, transfer of a customer’s positions and related funds. The Commission is further amending the provision to require the transfer of related funds ‘‘as necessary,’’ recognizing that the transfer of customer positions will not always require the transfer of funds. 6. Permitted Investments—§ 39.15(e) Regulation 39.15(e) requires any investment of customer funds or assets by a DCO to comply with § 1.25, as if all such funds and assets comprise customer funds subject to segregation pursuant to section 4d(a) of the CEA and Commission regulations thereunder. At the time § 39.15(e) was adopted, the Commission had not yet adopted regulations concerning cleared swaps customer funds but intended for § 39.15(e) to also apply to those funds. The Commission has since adopted the part 22 regulations and therefore is proposing to amend § 39.15(e) to clarify that the requirement applies to any investment of customer funds or assets, including cleared swaps customer collateral as defined in § 22.1. F. Default Rules and Procedures— § 39.16 Regulation 39.16 codifies Core Principle G, which requires a DCO to PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 22239 have rules and procedures designed to allow for the efficient, fair, and safe management of events during which a clearing member becomes insolvent or otherwise defaults on its obligations to the DCO. Core Principle G also requires a DCO to clearly state its default procedures, make its default rules publicly available, and ensure that it may take timely action to contain losses and liquidity pressures while continuing to meet its obligations. The Commission is proposing to amend certain aspects of § 39.16.55 1. Default Management Plan—§ 39.16(b) Regulation 39.16(b) requires a DCO to have a default management plan and, among other things, test the plan at least on an annual basis. A DCO’s default management plan involves its clearing members, so the Commission believes the plan cannot be tested effectively without the clearing members’ participation. Accordingly, the Commission is proposing to amend § 39.16(b) to add a requirement that the DCO include clearing members in a test of its default management plan on at least an annual basis. A DCO should ensure that a sufficient portion of its clearing membership participates in such testing and is therefore prepared to support the DCO’s default management efforts. 2. Default Procedures—§ 39.16(c) Regulation 39.16(c) requires a DCO to adopt procedures that would permit the DCO to take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a default by one if its clearing members. The Commission is proposing to amend § 39.16(c)(1) to require a DCO to have a default committee that would be convened in the event of a default involving substantial or complex positions to help identify market issues with any action the DCO is considering. The default committee would be required to include clearing members and could include other participants to help the DCO efficiently manage the house or customer positions of the defaulting clearing member. The Commission also is proposing to amend § 39.16(c)(2)(ii) to require that a DCO have default procedures that include immediate public notice on the DCO’s website of a declaration of default. The Commission believes it is important to the integrity and stability of the financial markets that clearing members, other CCPs, and the public 55 The proposed amendments to § 39.16 include replacing ‘‘adopt’’ with ‘‘have’’ where a DCO is required to adopt rules, consistent with the proposed changes to § 39.12 previously discussed. E:\FR\FM\16MYP2.SGM 16MYP2 22240 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 become aware as soon as possible when a default has occurred. The Commission requests comment, however, as to whether the timing of the announcement would potentially impact the market or the DCO’s ability to manage the default. Finally, § 39.16(c)(2)(iii)(C) requires any allocation of a defaulting clearing member’s positions to be proportional to the size of the participating or accepting clearing member’s positions in the same product class at the DCO. The Commission is proposing to amend this provision to clarify that the DCO shall not require a clearing member to bid for a portion of, or accept an allocation of, the defaulting clearing member’s positions that is not proportional to the size of the bidding or accepting clearing member’s positions in the same product class at the DCO. This is intended to clarify that a clearing member that wishes to voluntarily bid for or accept more than its proportional share should be allowed to do so, provided that the clearing member has the ability to manage the risk of the new positions. The Commission is proposing to further amend § 39.16(c)(2)(iii)(C) in order to clarify that the provision applies to both auctions and allocations and to provide that the size of the participating or accepting clearing member’s positions in the same product class at the DCO should be measured by the clearing initial margin requirement for those positions. The Commission requests comment as to whether the Commission should require DCOs to take into consideration other indicators of active participation in a market, such as open interest, volume, and/or other criteria. G. Rule Enforcement—§ 39.17 Regulation 39.17(a) codifies Core Principle H, which requires a DCO to maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules and dispute resolution. Core Principle H also requires a DCO to have the authority and ability to discipline, limit, suspend, or terminate the activities of a member or participant if it violates the DCO’s rules. Finally, Core Principle H requires a DCO to report its rule enforcement activities and sanctions imposed on members and participants to the Commission. The Commission is proposing to amend § 39.17(a)(1) to clarify the Commission’s expectation that DCOs currently do, and will continue to, ensure that both the DCO and its members comply with the DCO’s rules. Regulation 39.17(b) permits a DCO’s board of directors to delegate its VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 responsibility for compliance with the requirements of § 39.17(a) to the DCO’s risk management committee. The Commission recognizes that some DCOs delegate such responsibility to a committee other than the risk management committee. Therefore, the Commission is proposing to amend § 39.17(b) to replace ‘‘risk management committee’’ with ‘‘an appropriate committee.’’ H. Reporting—§ 39.19 Regulation 39.19 implements Core Principle J, which requires that each DCO provide to the Commission all information that the Commission determines to be necessary to conduct oversight of the DCO. In addition to clarifying existing requirements, the Commission is proposing to adopt additional reporting requirements that would allow the Commission to conduct more effective oversight of DCO compliance with the DCO Core Principles and Commission regulations. 1. General—§ 39.19(a) The Commission is proposing to revise the text of § 39.19(a) to match the text of Core Principle J. The proposed revisions are not meant to alter the meaning of the provision. 2. Submission of Reports—§ 39.19(b) Regulation 39.19(b)(1) requires a DCO to submit the information required by the section to be submitted to the Commission electronically and in a format and manner specified by the Commission, unless otherwise specified by the Commission or its designee. The Commission is proposing to delete ‘‘[u]nless otherwise specified by the Commission or its designee’’ and ‘‘electronically,’’ requiring a DCO to submit the information in a format and manner specified by the Commission. This would simplify the text while retaining the flexibility the Commission originally intended. The Commission is proposing new § 39.19(b)(2) to require that when making a submission pursuant to the section, an employee of a DCO must certify that he or she is duly authorized to make such a submission on behalf of the DCO. This provision would codify existing practices with respect to the use of the CFTC Portal for submissions pursuant to § 39.19. Finally, the Commission is proposing to remove existing § 39.19(b)(3) and move the definition of ‘‘business day’’ to § 39.2, as previously discussed. Existing § 39.19(b)(2) would be renumbered as § 39.19(b)(3). PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 3. Daily Reporting of Information— § 39.19(c)(1)(i) Regulation 39.19(c)(1)(i) requires a DCO to report to the Commission on a daily basis margin, cash flow, and position information for each clearing member, by house origin and by each customer origin. The Commission is proposing to amend § 39.19(c)(1)(i) to require a DCO to additionally report margin, cash flow, and position information by individual customer account, which is information the DCOs currently provide. The Commission is specifying ‘‘individual customer account,’’ as individual customers may have multiple accounts, which should be reported separately. The Commission is also proposing to have DCOs provide any legal entity identifiers and internally-generated identifiers within each customer origin for each clearing member. The Commission is also proposing to amend § 39.19(c)(1)(i)(D) to specify that, with respect to end-of-day positions, DCOs must report the positions themselves (i.e., the long and short positions) as well as risk sensitivities and valuation data for these positions. Risk-sensitivities are different measures of the impact of changes in underlying factors on the value of the positions. For example, an interest rate delta describes the theoretical profit or loss (‘‘P&L’’) that results from a one basis point increase in a currency’s interest rate curve. A delta ladder describes a series of sensitivities for different maturity points (tenors) where each ‘‘rung’’ represents an increasing maturity point or tenor along the zero rate curve term structure. Each value on the rung represents the P&L that the portfolio would experience if the interest rate for that tenor were to increase by one basis point, all else being equal. Thus, if the entire curve were to shift up by one basis point, the portfolio’s theoretical P&L would be equal to the sum of all the individual sensitivities. In the context of options, examples of risk sensitivities would be the different Greeks—delta measures an option’s price sensitivity relative to changes in the price of the underlying asset, gamma measures the sensitivity of delta in response to price changes in the underlying instrument, vega measures an option’s sensitivity to changes in the volatility of the underlying, theta measures the time decay of an option. Valuation data refer to variables and inputs that reflect current market conditions, as well as expectations for the future. In the case of credit default swaps, valuation models rely on for example, risk neutral default E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 probabilities of swaps, forward credit spreads for different maturities. For interest rate swaps, valuation models require discount factors. The Commission intends to implement a range of different methodologies to conduct risk surveillance of cleared derivatives exposures, some involving full revaluation of portfolios and others relying on delta ladders and other risk sensitivities. Collectively, the enhanced information sets will enable Commission staff to run stress tests; identify concentration and risk in currencies and in maturity buckets; perform back testing; validate guaranty funds; and validate variation margin. 4. Daily Reporting on Securities Positions—§ 39.19(c)(1)(ii)(C) Regulation 39.19(c)(1)(i) requires DCOs to submit certain information to the Commission on a daily basis, e.g., initial margin requirements, initial margin on deposit, daily variation margin, other daily cash flows such as option premiums, and end-of day positions. Paragraph (c)(1)(ii)(C) further instructs DCOs to provide the required information for all securities positions that are held in a customer account subject to section 4d of the CEA or are subject to a cross-margining agreement. Paragraph (c)(1)(ii)(C) was added to clarify the applicability of daily reporting requirements to securities positions carried by FCMs that are also registered broker-dealers. Since the adoption of § 39.19(c)(1), the Commission has become aware of a potential ambiguity in the wording of paragraph (c)(1)(ii)(C), which requires the reporting of all securities positions ‘‘that are held in a customer account subject to section 4d of the Act or are subject to a cross-margining agreement.’’ The ambiguity concerns whether the reporting requirement for securities positions subject to a cross-margining agreement applies to customer positions only or to any position subject to a cross-margining agreement, whether house or customer. Reporting of securities positions is designed to capture positions that could have an impact on the risks a DCO must manage. Because risks associated with securities positions subject to a crossmargining agreement would be relevant to the DCO’s risk management function and therefore the Commission’s risk surveillance program, all such securities positions, whether house or customer, were intended to be included in daily reporting. In order to avoid ambiguity and more precisely articulate the scope of paragraph (c)(1)(ii)(C), the Commission is proposing to insert VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 subordinate paragraph numbering between the clauses in paragraph (c)(1)(ii)(C) which relate to securities positions held in a customer account or subject to a cross-margining agreement. 5. Quarterly Reporting—§ 39.19(c)(2) Regulation 39.19(c)(2) requires a DCO to provide the financial resources report required by § 39.11(f). The Commission adopted § 39.19(c)(2) so that each DCO reporting requirement would be included in § 39.19. The Commission is proposing to revise the text of § 39.19(c)(2) to be more consistent with the text of § 39.11(f); i.e., a DCO would be required to provide to the Commission each fiscal quarter, or at any time upon Commission request, a report of the DCO’s financial resources as required by § 39.11(f)(1). 6. Audited Year-End Financial Statements—§ 39.19(c)(3)(ii) Regulation 39.19(c)(3)(ii) requires a DCO to file with the Commission its audited year-end financial statements or, if there are no financial statements available for the DCO, the consolidated audited year-end financial statements of the DCO’s parent company. As with the quarterly filing requirements of § 39.11(f)(1)(ii), the purpose of requiring a DCO to submit year-end financial statements is to enable the Commission to assess the financial strength of the DCO. However, if a DCO is part of a large and complex corporate structure and files its parent company’s financial statements, it can be difficult for the Commission to assess the financial strength of the DCO itself. Therefore, the Commission is proposing to amend § 39.19(c)(3)(ii) to require the audited year-end financial statements of the DCO. 7. Time of Report—§ 39.19(c)(3)(iv) Regulation 39.19(c)(3)(iv) requires a DCO to submit concurrently to the Commission all reports required by paragraph (c)(3) not more than 90 days after the end of the DCO’s fiscal year. The Commission may provide an extension of time only if it determines that a DCO’s failure to submit the report in a timely manner ‘‘could not be avoided without unreasonable effort or expense.’’ 56 The Commission is proposing to eliminate this requirement to provide it with the flexibility to grant extensions under additional circumstances when appropriate. Additionally, the Commission is proposing to remove the requirement 56 The Commission delegated this authority to the Director of the Division of Clearing and Risk under § 140.94(c)(9). PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 22241 that reports be submitted concurrently in order to provide DCOs with the flexibility to submit reports required under § 39.19(c)(3) as they are completed. The Commission recognizes that one report may be completed sooner than the other and believes it would benefit the Commission’s oversight of the DCO if the Commission could begin reviewing the report as soon as it is ready. 8. Decrease in Financial Resources— § 39.19(c)(4)(i) The Commission is proposing a technical amendment to § 39.19(c)(4)(i), which concerns reporting of a decrease in a DCO’s financial resources. The amendment would add a reference to the financial resources requirements of § 39.33, which applies to SIDCOs and subpart C DCOs. The Commission also is proposing to renumber the subordinate paragraphs for the sake of clarity. 9. Decrease in Liquidity Resources— § 39.19(c)(4)(ii) The Commission is proposing to adopt new § 39.19(c)(4)(ii),57 which would require the same reporting for a decrease in liquidity resources as that required by § 39.19(c)(4)(i) for a decrease in overall financial resources. The reporting required in § 39.11(f)(1)(ii) provides the Commission with notice of any change in a DCO’s liquidity resources over the course of a fiscal quarter. This new provision would provide the Commission with notice if a DCO has a significant decrease in liquidity resources over a short period of time, which could indicate there is a greater issue of which the Commission should be aware. 10. Request to Clearing Member To Reduce Positions—§ 39.19(c)(4)(vi) The Commission is proposing to amend current § 39.19(c)(4)(v), proposed to be renumbered as § 39.19(c)(4)(vi), which requires a DCO to notify the Commission immediately of a request by the DCO to one of its clearing members to reduce the clearing member’s positions, by deleting the words ‘‘because the [DCO] has determined that the clearing member has exceeded its exposure limit, has failed to meet an initial or variation margin call, or has failed to fulfill any other financial obligation to the [DCO].’’ The Commission believes it should be 57 The Commission is proposing to renumber existing § 39.19(c)(4)(ii) and all subsequent paragraphs of § 39.19(c)(4). E:\FR\FM\16MYP2.SGM 16MYP2 22242 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules notified of such a request regardless of the reason for the request. 11. Change in Key Personnel— § 39.19(c)(4)(x) The Commission is proposing to amend current § 39.19(c)(4)(ix), proposed to be renumbered as § 39.19(c)(4)(x), which requires a DCO to report to the Commission no later than two business days following the departure or addition of persons who are key personnel as defined in § 39.2. The Commission proposes to clarify that the notification requirement applies to both temporary and permanent replacements, and that the report must include contact information. 12. Change in Legal Name— § 39.19(c)(4)(xi) The Commission is proposing to adopt new § 39.19(c)(4)(xi), which would require a DCO to report a change to the legal name under which it operates. This requirement would help to ensure that DCO-specific information reflected on the Commission’s website, as well as in the Commission’s internal records, is accurate and up-to-date. The Commission notes, however, that the DCO’s registration order (and other existing orders issued by the Commission) would not need to be changed to reflect the legal name change. 13. Change in Liquidity Funding Arrangement—§ 39.19(c)(4)(xiii) The Commission is proposing to adopt new § 39.19(c)(4)(xiii), which would require a DCO to report a change in any liquidity funding arrangement it has in place. This requirement would be similar to that of § 39.19(c)(4)(x) (proposed to be renumbered as § 39.19(c)(4)(xii)), which requires a DCO to report any change in a credit facility funding arrangement it has in place. This will assist the Commission in overseeing the liquidity risk management of DCOs. khammond on DSKBBV9HB2PROD with PROPOSALS2 14. Change in Settlement Bank Arrangements—§ 39.19(c)(4)(xiv) The Commission is proposing to adopt new § 39.19(c)(4)(xiv), which would require a DCO to report a change in its arrangements with any settlement bank used by the DCO or approved for use by the DCO’s clearing members. Receiving such reporting will aid the Commission in monitoring a DCO’s compliance with § 39.14(c), which sets forth specific requirements for settlement arrangements. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 15. Settlement Bank Issues— § 39.19(c)(4)(xv) The Commission is proposing to adopt new § 39.19(c)(4)(xv), which would require a DCO to report to the Commission no later than one business day after learning of any material issues or concerns regarding the performance, stability, liquidity, or financial resources of any settlement bank used by the DCO or approved for use by the DCO’s clearing members. 16. Change in Depositories for Customer Funds—§ 39.19(c)(4)(xvi) The Commission is proposing to adopt new § 39.19(c)(4)(xvi), which would require a DCO to report any change in its arrangements with any depositories at which the DCO holds customer funds. Receiving such reporting will aid the Commission in monitoring a DCO’s compliance with section 4d of the CEA and related Commission regulations regarding the treatment of customer funds, including § 39.15(b). 17. Change in Fiscal Year— § 39.19(c)(4)(xx) The Commission is proposing to adopt new § 39.19(c)(4)(xx), which would require a DCO to immediately notify the Commission of any change to the start and end dates for its fiscal year. Because several other required reports are tied to a DCO’s fiscal year (e.g., quarterly financial reports, annual report of the chief compliance officer), a change in the DCO’s fiscal year would change the reporting periods and deadlines for those reports, and the Commission would need to know when those reports are to be submitted by the DCO. 18. Change in Independent Accounting Firm—§ 39.19(c)(4)(xxi) The Commission is proposing to adopt new § 39.19(c)(4)(xxi), which would require a DCO to report to the Commission no later than one business day after any change in the DCO’s independent public accounting firm. The report would include the date of such change, the name and contact information of the new firm, and the reason for the change. 19. Major Decision of the Board of Directors—§ 39.19(c)(4)(xxii) The Commission is proposing to adopt new § 39.19(c)(4)(xxii) to codify in § 39.19 the requirement (currently in § 39.32(a)(3)(i) and proposed in § 39.24(a)(3)(i), as discussed further below) that a DCO report to the Commission any major decision of the DCO’s board of directors. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 20. Margin Model Issues— § 39.19(c)(4)(xxiv) The Commission is proposing to adopt new § 39.19(c)(4)(xxiv), which would require a DCO to report to the Commission no later than one business day after any issue occurs with a DCO’s margin model, including margin models for cross-margined portfolios, that affects the DCO’s ability to calculate or collect initial margin or variation margin. The Commission is proposing this change because some DCOs have had unanticipated issues arise with the functioning of their margin models as a result of, among other things, the introduction of new products or significant increases in volatility. 21. Recovery and Wind-Down Plans— § 39.19(c)(4)(xxv) The Commission is proposing to adopt new § 39.19(c)(4)(xxv), which would require a DCO that is required to maintain recovery and wind-down plans pursuant to § 39.39(b) to submit its plans to the Commission no later than the date on which it is required to have the plans. The Commission is also proposing to permit a DCO that is not required to maintain recovery and winddown plans pursuant to § 39.39(b), but which nonetheless maintains such plans, to submit the plans to the Commission. If a DCO subsequently revises its plans, the DCO would be required to submit the revised plans to the Commission along with a description of the changes and the reason for those changes. The Commission is proposing this requirement because § 39.39(b) requires certain DCOs to maintain recovery and wind-down plans, but there is currently no explicit requirement that the DCOs submit the plans to the Commission. 22. New Product Accepted for Clearing—§ 39.19(c)(4)(xxvi) The Commission is proposing to adopt new § 39.19(c)(4)(xxvi), which would require a DCO to provide notice to the Commission no later than 30 calendar days prior to accepting a new product for clearing. The Commission is proposing this change because § 40.2 requires a DCM or SEF to make a submission to the Commission prior to listing a product for trading that has not been approved under § 40.3, but there is currently no comparable requirement applicable to DCOs. The proposed notice would include: (1) A brief description of the new product; (2) the date on which the DCO intends to begin accepting the new product for clearing; (3) a statement as to whether the new product will require E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules the DCO to submit any rule changes pursuant to §§ 40.5 or 40.6; (4) a statement as to whether the DCO has informed, or intends to inform, its clearing members and/or the general public of the new product and, if written notice was given, a web address for or copy of such notice; and (5) an explanation of any substantive opposing views received from such outreach and how the DCO addressed such views or objections. The Commission believes receiving the notice 30 days before the DCO will begin accepting the product for clearing will allow Commission staff enough time to ask further questions of the DCO as necessary. The Commission has not defined ‘‘product’’ for purposes of § 40.2 or § 40.3. The Commission requests comment on whether defining this term would be helpful in clarifying what products must be reported to the Commission under proposed new § 39.19(c)(4)(xxvi). If so, the Commission further requests comment regarding how the term should be defined. khammond on DSKBBV9HB2PROD with PROPOSALS2 23. Requested Reporting—§ 39.19(c)(5) Regulation 39.19(c)(5)(i) through (iii) requires a DCO to provide to the Commission, upon request by the Commission, specific types of information. Paragraphs (c)(5)(i) through (iii) states that the information must be provided to the Commission ‘‘in the format and manner specified, and within the time provided, by the Commission in the request.’’ The Commission is proposing to amend § 39.19(c)(5)(i) through (iii) by deleting this language from each of the subparagraphs and adding introductory language to the paragraph that would require a DCO to provide the information specified in the paragraphs upon request by the Commission ‘‘and within the time specified in the request.’’ Regulation 39.19(b) already requires a DCO to provide the information in the format and manner specified by the Commission, so it is unnecessary to repeat that requirement in § 39.19(c)(5). The Commission is proposing to remove current § 39.19(c)(5)(iii), which requires a DCO to report to the Commission upon request end of day gross positions by each beneficial owner. This provision is no longer necessary given the proposed amendment to § 39.19(c)(1)(i), which requires a DCO to report margin, cash flow, and position information by individual customer account. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 I. Public Information—§ 39.21 Regulation 39.21 implements Core Principle L, which generally requires that a DCO provide to market participants sufficient information to enable the market participants to identify and evaluate accurately the risks and costs associated with using the services of the DCO. The Commission is proposing some minor changes to clarify the requirements of § 39.21. 1. Public Disclosure and Publication of Information—§ 39.21(c) and (d) Regulation 39.21(c) requires a DCO to disclose publicly and to the Commission information concerning: (1) The terms and conditions of each contract, agreement, and transaction cleared and settled by the DCO; (2) each clearing and other fee that the DCO charges its clearing members; (3) the margin-setting methodology; (4) the size and composition of the financial resource package available in the event of a clearing member default; (5) daily settlement prices, volume, and open interest for each contract, agreement, or transaction cleared or settled by the DCO; (6) the DCO’s rules and procedures for defaults in accordance with § 39.16; and (7) any other matter that is relevant to participation in the clearing and settlement activities of the DCO. Regulation 39.21(d) requires the DCO to post all of this information, as well as the DCO’s rulebook and a list of its current clearing members, on the DCO’s website, unless otherwise permitted by the Commission. The Commission is proposing to remove § 39.21(d) and incorporate its requirements into § 39.21(c). The Commission believes that this will help clarify for DCOs what information must be made publicly available on their websites. The Commission has noted that some DCOs have made available certain items of information listed in current § 39.21(c) only by posting their rulebooks on their websites. The Commission wishes to clarify that a DCO must make each of the items of information listed in proposed § 39.21(c) available separately on the DCO’s website and not just in the DCO’s rulebook. This will assist members of the public in locating the relevant information and may facilitate greater uniformity across DCO websites. 22243 concerning how often this information must be updated. Regulation 39.11(f)(1)(i)(A) requires a DCO to report this information to the Commission each fiscal quarter or at any time upon Commission request. The Commission believes it is reasonable to expect a DCO to update this information publicly with the same frequency. Therefore, the Commission is proposing to amend § 39.21(c)(4) by adding the words ‘‘updated as of the end of the most recent fiscal quarter or upon Commission request and posted concurrently with submission of the report to the Commission under § 39.11(f)(1)(i)(A).’’ 3. Daily Settlement Prices, Volume, and Open Interest—§ 39.21(c)(5) Regulation 39.21(c)(5) requires a DCO to disclose publicly daily settlement prices, volume, and open interest for each contract, agreement, or transaction cleared or settled by the DCO. Pursuant to current § 39.21(d), this information must be made available to the public on the DCO’s website no later than the business day following the day to which the information pertains. The Commission has received questions from DCOs about the appropriate scope and time period for disclosure of daily settlement prices. With respect to scope, § 39.21(c)(5) clearly refers to daily settlement prices, volume, and open interest ‘‘for each contract, agreement, or transaction cleared or settled’’ by the DCO. The Commission therefore expects comprehensive disclosure of daily settlement prices, volume, and open interest for all contracts cleared or settled by the DCO, acting in its capacity as a DCO.58 However, the Commission is aware that certain DCOs may not be posting all of the required information on their websites. The Commission notes that current § 39.21(d) requires posting of this information ‘‘unless otherwise permitted by the Commission.’’ Accordingly, any DCO that does not post all of the required information must seek relief from the Commission. In addition, although the plain language of § 39.21(c)(5) indicates that ‘‘daily’’ is intended to apply not only to settlement prices, but also to volume and open interest, the Commission hereby confirms that DCOs are expected to publicly disclose 2. Financial Resources—§ 39.21(c)(4) Regulation 39.21(c)(4) requires a DCO to disclose publicly the size and composition of its financial resource package available in the event of a clearing member default. The Commission has received questions PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 58 Regulation 39.21(c)(5) does not require a DCO to post information concerning contracts, agreements, or transactions it clears outside of its capacity as a DCO. For example, a DCO that is also registered with the SEC as a securities clearing agency would not have to post information concerning security-based swaps in order to comply with this provision. E:\FR\FM\16MYP2.SGM 16MYP2 22244 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules volume and open interest, as well as settlement prices, on a daily basis in order to comply with § 39.21(c)(5). Regulation 39.21(c)(5) does not specify a period of time the information must remain on the website. However, the Commission notes that certain DCOs make several days’ worth of information available on their websites, and the Commission encourages others to do the same. khammond on DSKBBV9HB2PROD with PROPOSALS2 4. Swaps Required To Be Cleared— § 39.21(c)(8) Regulation 50.3(a) requires that a DCO make publicly available on its website a list of all swaps that it will accept for clearing and identify which swaps on the list are required to be cleared under section 2(h)(1) of the CEA and part 50 of the Commission’s regulations. The Commission is proposing to adopt § 39.21(c)(8) to add a cross-reference to § 50.3(a). J. Governance Fitness Standards, Conflicts of Interest, and Composition of Governing Boards—§§ 39.24, 39.25, and 39.26 The Dodd-Frank Act added three new core principles to the CEA relating to the governance of a DCO and the mitigation of potential conflicts of interest within a DCO. Core Principle O requires a DCO to establish governance arrangements that are transparent to fulfill public interest requirements and to permit the consideration of the views of owners and participants. Core Principle O also requires a DCO to establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the DCO, any other individual or entity with direct access to the settlement or clearing activities of the DCO, and any other party affiliated with any of the foregoing individuals or entities. Core Principle P requires a DCO to establish and enforce rules to minimize conflicts of interest in the decisionmaking process of the DCO and establish a process for resolving such conflicts of interest. Core Principle Q requires a DCO to ensure that the composition of its governing board or committee includes market participants. After the Dodd-Frank Act was enacted, the Commission proposed regulations that would have implemented Core Principles O, P, and Q.59 Those regulations have not been 59 See Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010); Governance Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities; Additional VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 finalized, but the Commission did adopt other regulations that address some of the same issues that the proposed regulations would have addressed. For example, § 39.12(a)(1) requires a DCO to have participant eligibility criteria that permit fair and open access to the DCO; this addresses the concern that a DCO’s existing clearing members might try to block potential members’ access to the DCO for reasons that are not riskbased.60 As previously noted, the Commission also adopted subpart C of part 39 of the Commission’s regulations.61 Included in subpart C is § 39.32, which sets forth the requirements for governance arrangements for SIDCOs and subpart C DCOs. In promulgating § 39.32, the Commission noted that its requirements are consistent with Core Principles O, P, and Q.62 The Commission is proposing to remove § 39.32 and adopt new §§ 39.24, 39.25, and 39.26, which would incorporate all of the requirements of § 39.32 and move them to subpart B, making them applicable to all DCOs, not just SIDCOs and subpart C DCOs. These governance requirements are designed to enhance risk management and controls by promoting transparency of governance arrangements and making sure that the interests of a DCO’s clearing members and, where relevant, their customers are taken into account. The Commission believes these standards are appropriate for all DCOs, as most DCOs already meet such standards in order to be considered a QCCP, and incorporate best practices within the clearing industry. The Commission notes, however, that while the language that is proposed to be adopted in these sections is essentially the same as that which is included in § 39.32, the provisions have been rearranged to correspond with the relevant core principle—§ 39.24 implements Core Principle O; § 39.25 implements Core Principle P; and § 39.26 implements Core Principle Q. As noted above, Core Principle Q requires a DCO to ensure that the composition of its governing board or committee includes market participants. The Commission has become aware of issues in interpreting this requirement. Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011). The Commission is withdrawing these proposals as they relate to DCOs. 60 Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR at 63735–36. 61 See Derivatives Clearing Organizations and International Standards, 78 FR 72476 (Dec. 2, 2013). 62 See id. at 72485–86. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 In order to avoid ambiguity and provide greater clarity, the Commission is proposing to clarify certain aspects of this requirement. First, Commission staff has received questions as to whether the term ‘‘governing’’ should be read to apply only to the term ‘‘board,’’ or if it should be read to apply to the term ‘‘committee’’ as well. Consistent with the title of Core Principle Q, ‘‘Composition of Governing Boards,’’ the Commission interprets this clause to refer to the governing body, whether a ‘‘board’’ or a ‘‘committee,’’ and does not interpret this clause to refer to the ‘‘governing board’’ or a ‘‘committee,’’ which could be any type of committee. Therefore, the Commission is proposing to require market participation on the DCO’s governing board or board-level committee, i.e., the group with the ultimate decision-making authority. Second, the Commission is proposing to define ‘‘market participant’’ in part 39 to mean any clearing member of the DCO or customer of such clearing member, or an employee, officer, or director of such an entity. A DCO’s clearing members and their customers have a unique perspective that complements that of the other decision makers on the governing board. Customers clearing trades through an FCM in a particular market are exposed to the risks of that market, just as clearing members are, and therefore have similar interests in the decisions that govern the operations of the DCO. In general, clearing members and their customers understand risk, have market experience and perspective, and have knowledge of clearing and the markets for which the DCO clears. The Commission notes that an employee, officer, or director of a market participant serving on a DCO’s governing board or committee is not necessarily required to have voting power, as such participation may impose duties that are in conflict with the employee, officer, or director’s duties to the market participant. However, a non-voting market participant must otherwise be enabled by the DCO to participate fully in board meetings in terms of receiving information, providing input, and representing market participant views. K. Legal Risk—§ 39.27 Regulation 39.27(c) requires a DCO that provides clearing services outside the United States to identify and address conflict of law issues, specify a choice of law, be able to demonstrate the enforceability of its choice of law in relevant jurisdictions, and be able to demonstrate that its rules, procedures, and contracts are enforceable in all E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules relevant jurisdictions. In addition, Form DCO requires each applicant for DCO registration that provides or will provide clearing services outside the United States to provide a memorandum to the Commission that would, among other things, analyze the insolvency issues in the jurisdiction where the applicant is based. The Commission is proposing to amend § 39.27(c) by adding paragraph (c)(3). Proposed § 39.27(c)(3) would require a DCO that provides clearing services outside the United States to ensure on an ongoing basis that the memorandum required in Exhibit R of Form DCO is accurate and up to date and to submit an updated memorandum to the Commission promptly following all material changes to the analysis or content contained in the memorandum. L. Fully-Collateralized Positions khammond on DSKBBV9HB2PROD with PROPOSALS2 The Commission has oversight of a few registered DCOs that clear fullycollateralized positions. Fullycollateralized positions are designed to have on deposit a sufficient amount of funds, at all times, to cover the maximum potential loss that could be incurred in connection with a position. In the case of binary options, for example, the maximum risk is limited to the amount invested in the option. Because counterparties do not take a position in the underlying asset, movements in the underlying asset would not affect the payout received or loss incurred. Full collateralization prevents a DCO from being exposed to credit risk stemming from the inability of a clearing member or customer of a clearing member to meet a margin call or a call for additional capital. This limited exposure and full collateralization of that exposure renders certain provisions of part 39 inapplicable or unnecessary. As a result, the Division has granted relief from certain provisions of part 39 to DCOs that clear fully-collateralized positions.63 With this release, the Commission is proposing to codify this relief and to provide clarity to DCOs and future applicants for DCO registration regarding how the regulations in part 39 apply to DCOs that clear fullycollateralized positions.64 63 See CFTC Letter No. 14–04 (January 16, 2014) (granting exemptive relief to the North American Derivatives Exchange, Inc. (Nadex)); CFTC Letter No. 17–35 (July 24, 2017) (granting exemptive relief to LedgerX). 64 The Division also issued interpretive guidance to Nadex for other provisions in part 39. CFTC Letter No. 14–05 (January 16, 2014). The interpretive guidance may be relied on by third parties, and is not impacted by this proposed rulemaking. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Fully-collateralized positions do not expose DCOs to many of the risks that traditionally margined products do. Therefore, the Commission is proposing to amend certain part 39 regulations to better accommodate fully-collateralized positions, where full-collateralization addresses the risks that the regulations are meant to address. The proposed amendments are based on an assessment of how the DCO Core Principles and part 39 apply to fullycollateralized positions, as well as the relief previously granted to DCOs that clear such positions. The Commission believes the proposed amendments would not negatively impact prudent risk management at any DCO, regardless of the types of products cleared. 1. Definition of ‘‘Fully-Collateralized Positions’’—§ 39.2 The Commission is proposing to define a ‘‘fully-collateralized position’’ as a contract cleared by a derivatives clearing organization that requires the derivatives clearing organization to hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible loss that a counterparty could incur upon liquidation or expiration of the contract. 2. Computation of Financial Resources Requirement—§ 39.11(c)(1) Regulation 39.11(a)(1) requires a DCO to maintain financial resources sufficient to meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the DCO in extreme but plausible market conditions. Regulation 39.11(c)(1) 65 requires a DCO to perform monthly stress testing in order to make a reasonable calculation of the financial resources it would need in the event of such a default. Division staff has expressed the view that a DCO can satisfy the requirements of § 39.11(a)(1) by clearing fully-collateralized positions.66 For fully-collateralized positions, a DCO holds its maximum possible loss on each contract at all times and does not face the risk of a clearing member default. The monthly stress tests required by § 39.11(c)(1)(i) are therefore unnecessary for fullycollateralized positions. Accordingly, the Commission is proposing to amend § 39.11(c)(1)(i) to clarify that a DCO does 65 Revisions contained elsewhere in this proposed rulemaking would renumber this paragraph as § 39.11(c)(1)(i). 66 See CFTC Letter No. 14–05 (January 16, 2014) (providing interpretive guidance to Nadex). PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 22245 not have to perform monthly stress tests on fully-collateralized positions. 3. Liquidity of Financial Resources— § 39.11(e)(1)(ii) Regulation 39.11(e)(1)(ii) requires a DCO to have enough financial resources to meet the requirements of § 39.11(a)(1) that are sufficiently liquid to enable the DCO to fulfill its obligations during a one-day settlement cycle. The specific amount of liquid resources a DCO must hold is based on the historical settlement pays of its clearing members. A DCO maintains sufficient liquidity for fully-collateralized positions by requiring clearing members to post the full potential loss of a position in the form of the potential obligation. Requiring collateral to be in the form of the potential obligation eliminates the risk that the DCO will not have sufficient liquidity to meet its obligations and the need for daily markto-market settlements. Further, if a DCO were to complete the calculation required by § 39.11(e)(1)(ii), the amount would not change from day to day as the DCO operates a fully-collateralized model. As a result, the calculation required in § 39.11(e)(1)(ii) is neither necessary or applicable for fullycollateralized positions. The Commission is therefore proposing to amend § 39.11(e)(1)(iv) to clarify that DCOs do not need to include fullycollateralized positions in the calculation required thereunder. 4. Periodic Reporting of Participant Eligibility—§ 39.12(a)(5)(i) and (a)(5)(i)(B) Regulation 39.12(a)(5)(i) requires a DCO to require its clearing members to provide the DCO with periodic financial reports that allow the DCO to assess whether participation requirements are being met on an ongoing basis. Regulation 39.12(a)(5)(i)(B) 67 requires a DCO to make these reports available to the Commission at the Commission’s request.68 The Commission’s participant eligibility requirements in § 39.12(a) are intended to ensure that DCO participants maintain sufficient financial resources and operational capacity to meet the obligations arising from clearing at a DCO.69 Clearing members that only clear fullycollateralized positions present no 67 Revisions contained elsewhere in this proposed rulemaking would renumber § 39.12(a)(5)(i)(B) as § 39.12(a)(5)(iii). 68 Regulation 39.12(a)(5)(i)(B) allows DCOs to either require clearing members to make the reports available to the Commission or to provide the reports to the Commission directly. 69 See Derivatives Clearing Organization General Provisions and Core Principles, 76 FR at 69352. E:\FR\FM\16MYP2.SGM 16MYP2 22246 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules credit or default risk to the DCO because their full potential loss is already held by the DCO. Thus, periodic financial reports from non-FCM clearing members that only clear fully-collateralized positions do not provide any risk management benefit to DCOs. The Commission therefore is proposing to add new § 39.12(a)(5)(v) to exclude nonFCM clearing members that only clear fully-collateralized positions from the financial reporting requirements in § 39.12(a)(5)(i) and (a)(5)(i)(B). 5. Large Trader Stress Tests— § 39.13(h)(3) Regulation 39.13(h)(3) requires a DCO to conduct stress testing on a daily basis with respect to each large trader who poses significant risk to a clearing member or the DCO, and at least on a weekly basis with respect to each clearing member account, by house origin and by each customer origin. As discussed above, DCOs hold, at all times, the full potential loss of fullycollateralized positions cleared by the DCO, and a DCO does not face the risk of default from accounts that only hold fully-collateralized positions. As a result, such stress tests would not provide DCOs new information on accounts that only clear fullycollateralized positions. The Commission is therefore proposing to add new § 39.13(h)(3)(iii) to exclude clearing member accounts that hold only fully-collateralized positions from the stress testing requirements in § 39.13(h)(3)(i) and (ii). 6. Daily Reporting—§ 39.19(c)(1)(i) khammond on DSKBBV9HB2PROD with PROPOSALS2 Regulation 39.19(c)(1)(i) requires a DCO to submit to the Commission a daily report containing information on initial margin, daily variation margin payments, other daily cash flows, and end-of-day positions. Because fullycollateralized positions do not pose a credit risk to the DCO or other participants, the Commission does not need daily reporting of this information with respect to fully-collateralized positions. Therefore, the Commission is proposing to amend § 39.19(c)(1)(i) such that the enumerated daily reporting is not required with respect to fullycollateralized positions. V. Amendments to Part 39—Subpart C—Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject to the Provisions A. Financial Resources for SIDCOs and Subpart C DCOs—§ 39.33 Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is systemically important in multiple VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 jurisdictions, or that is involved in activities with a more complex risk profile, to maintain financial resources sufficient to enable it to meet its financial obligations to its clearing members notwithstanding a default by the two clearing members creating the largest combined loss in extreme but plausible market conditions. The Commission is proposing to amend § 39.33(a)(1) by replacing the phrase ‘‘largest combined loss’’ with ‘‘largest combined financial exposure’’ in order to achieve consistency with the relevant provisions of Commission regulations and the CEA—specifically, § 39.11(a)(1) and section 5b(c)(2)(B) of the CEA regarding DCO financial resources requirements. Regulation 39.33(c)(1) requires a SIDCO or subpart C DCO to maintain eligible liquid resources sufficient to meet its obligations to perform settlements with a high degree of confidence under a wide range of stress scenarios that should include the default of the clearing member creating the largest aggregate liquidity obligation for the SIDCO or subpart C DCO. The Commission is proposing to amend § 39.33(c)(1) by adding the phrase ‘‘in all relevant currencies’’ to clarify that the ‘‘largest aggregate liquidity obligation’’ means the total amount of cash, in each relevant currency, that the defaulted clearing member would be required to pay to the DCO during the time it would take to liquidate or auction the defaulted clearing member’s positions, as reasonably modeled by the DCO. When evaluating its largest aggregate liquidity obligation on a dayto-day basis over a multi-day period, a SIDCO or subpart C DCO may use its liquidity risk management model. Regulation 39.33(d) requires a SIDCO or a subpart C DCO to undertake due diligence to confirm that each of its liquidity providers has the capacity to perform its commitments to provide liquidity, and to regularly test its own procedures for accessing its liquidity resources. The Commission is proposing to additionally require a SIDCO with access to deposit accounts and related services at a Federal Reserve Bank to use such services where practical. This requirement would further enhance a SIDCO’s financial integrity and management of liquidity risk.70 B. Risk Management for SIDCOs and Subpart C DCOs—§ 39.36 Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct stress tests of its financial and liquidity resources and to regularly conduct sensitivity analyses of its margin models. The Commission is proposing to amend § 39.36(a)(6) to clarify that a SIDCO or subpart C DCO that is subject to the minimum financial resources requirement set forth in § 39.11(a)(1), rather than § 39.33(a), should use the results of its stress tests to support compliance with that requirement. The Commission is also proposing to amend § 39.36(b)(2)(ii) to replace the words ‘‘produce accurate results’’ with ‘‘react appropriately’’ to more accurately reflect that the purpose of a sensitivity analysis is to assess whether the margin model will react appropriately to changes of inputs, parameters, and assumptions. The Commission is also proposing to amend § 39.36(d), which requires each SIDCO and subpart C DCO to ‘‘regularly’’ conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears, to clarify that the assessment should be conducted ‘‘on at least an annual basis (or more frequently if there are material relevant market developments).’’ The Commission is also proposing to amend § 39.36(e) by adding the heading ‘‘[i]ndependent validation’’ to the provision. 70 Under section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), the Board of Governors of the Federal Reserve System may authorize a Federal Reserve Bank to establish and maintain an account for a financial market utility (FMU), which includes a SIDCO. A SIDCO with access to accounts and services at a Federal Reserve Bank is required to comply with related rules published by the Board of Governors of the Federal Reserve System. See generally Financial Market Utilities, 78 FR 76973 (Dec. 20, 2013) (final rules adopted by the Board of Governors to govern accounts held by designated FMUs). 71 See CMPI–IOSCO, Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology (Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD396.pdf. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 C. Additional Disclosure for SIDCOs and Subpart C DCOs—§ 39.37 Regulation 39.37(a) and (b) requires a SIDCO or a subpart C DCO to publicly disclose its responses to the CPMI– IOSCO Disclosure Framework 71 and, in order to ensure the continued accuracy and usefulness of its responses, to review and update them at least every two years and following material changes to the SIDCO’s or subpart C DCO’s system or environment in which it operates. The Commission is proposing to amend § 39.37(b) to additionally require that a SIDCO or a subpart C DCO provide notice to the Commission of any such updates to its responses following material changes to its system or environment no later than ten business days after the updates are made. Further, such notice would have E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules to be accompanied by a copy of the text of the responses, specifying the changes that were made to the latest version of the responses. Providing this notice would ensure that the Commission has access to the most current information available and would enable the Commission to identify changes since the last update to the disclosure responses. Regulation 39.37(c) requires a SIDCO or a subpart C DCO to disclose, to the public and to the Commission, relevant basic data on transaction volume and values. In adopting this provision, the Commission noted that this requirement was intended to be consistent with the then-forthcoming quantitative disclosure standards being developed by CPMI–IOSCO.72 On February 26, 2015, CPMI–IOSCO published the Public Quantitative Disclosure Standards for Central Counterparties.73 The Commission is proposing to amend § 39.37(c) to explicitly state that a SIDCO or a subpart C DCO must disclose relevant basic data on transaction volume and values that are consistent with the standards set forth in the CPMI–IOSCO Public Quantitative Disclosure Standards for Central Counterparties. khammond on DSKBBV9HB2PROD with PROPOSALS2 D. Corrections to Subpart C Regulations The Commission is proposing to amend § 39.39(a)(2) to change the word ‘‘or’’ to ‘‘of.’’ VI. Amendments to Appendix A to Part 39—Form DCO To request registration as a DCO, § 39.3(a)(2) requires an applicant to file a complete Form DCO, which includes a cover sheet, all applicable exhibits, and any supplemental materials, as provided in appendix A to part 39. The Commission uses Form DCO, which is comprised of a series of different exhibits that require the applicant to provide details of its operations, to determine whether the applicant demonstrates compliance with the Act and applicable Commission regulations. Applicants must also use Form DCO to amend a pending application or request an amended order of registration. The Commission is proposing to amend Form DCO to better describe the required exhibits in a manner that is consistent with the proposed amendments to the relevant regulations as described herein. For example, the Commission proposes to amend Exhibit 72 Derivatives Clearing Organizations and International Standards, 78 FR at 72493. 73 See CPMI–IOSCO, Public Quantitative Disclosure Standards for Central Counterparties (Feb. 2015), available at https://www.bis.org/cpmi/ publ/d125.pdf. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 A–11 to incorporate the more flexible CCO reporting structure that the Commission is proposing in § 39.10(c)(1)(ii); add proposed Exhibit A–12 to describe a DCO’s enterprise risk management program as consistent with newly proposed § 39.10(d); amend Exhibit B–1 to incorporate proposed amendments to the Commission’s financial resources requirements in proposed § 39.11; and amend Exhibits O, P and Q to reflect the Commission’s proposed amendments to §§ 39.24, 39.25, and 39.26 which would incorporate the specific governance arrangement, conflict of interest, and board composition requirement, which are currently only detailed in § 39.32 for SIDCOs and subpart C DCOs. The Commission is also proposing to amend Form DCO to update the form to reflect the Commission’s other rulemaking efforts. For example, the Commission proposes to amend Exhibit A–6 to update the reference from public director to independent director to remove terminology that was proposed but not ultimately adopted by the Commission for certain governance requirements, and amend Exhibit F–2 to include cross-references to Commission regulations in part 22 which was adopted after the Commission adopted part 39. The Commission also proposes to amend Form DCO to eliminate information that has proven to be unnecessary to determine an applicant’s compliance with the Act and applicable Commission regulations. For example, the Commission proposes to eliminate the requirement within Exhibit A–6 that an applicant provide contact information for each officer, director, governor, general partners, LLC managers, and all standing committee members. Lastly, the Commission also proposes to remove references within the Form DCO instructions to use the form to request an amended order of registration. The Commission intends for these proposed Form DCO changes to establish a clearer application process for applicants that also provides the Commission with improved information to determine compliance with the Act and Commission regulations. VII. Amendments to Appendix B to Part 39—Subpart C Election Form The Commission is proposing to amend the subpart C Election Form to better reflect the requirements in subpart C of part 39 and to more closely align the format of the subpart C Election Form with Form DCO by specifying the information and/or documentation that must be provided PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 22247 by a DCO as part of its petition for subpart C election. Currently, unlike Form DCO, the subpart C Election Form references the corresponding regulations in subpart C, but does not specify the type or level of information that must be filed as an exhibit. In order to more closely align the format of the subpart C Election Form with Form DCO, the Commission is proposing to amend the subpart C Election Form to reflect the requirements of subpart C. VIII. Amendments to Part 140— Organization, Functions, and Procedures of the Commission Regulation 140.94 includes delegation of authority from the Commission to the Director of the Division of Clearing and Risk. The Commission is proposing to revise § 140.94 to conform to the changes to part 39 it is proposing in this release. IX. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires that agencies consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis on the impact.74 The regulations proposed by the Commission will affect only DCOs. The Commission has previously established certain definitions of ‘‘small entities’’ to be used by the Commission in evaluating the impact of its regulations on small entities in accordance with the RFA.75 The Commission has previously determined that DCOs are not small entities for the purpose of the RFA.76 Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act The Paperwork Reduction Act (PRA) 77 provides that Federal agencies, including the Commission, may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number from the Office of Management and Budget (OMB). This proposed rulemaking contains reporting and recordkeeping requirements that are collections of information within the meaning of the PRA. If adopted, 74 5 U.S.C. 601 et seq. FR 18618 (Apr. 30, 1982). 76 See 66 FR 45604, 45609 (Aug. 29, 2001). 77 44 U.S.C. 3501 et seq. 75 47 E:\FR\FM\16MYP2.SGM 16MYP2 22248 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 responses to the collections of information would be required to obtain a benefit. This section addresses the impact that the proposal will have on existing information collection requirements associated with part 39. Additionally, the Commission is consolidating four collections of information relating to requirements under part 39.78 The requirements covered by all four existing collections will be combined in OMB control number 3038–0076, which will be renamed as ‘‘Requirements for Derivatives Clearing Organizations,’’ and OMB control numbers 3038–0066, 3038–0069, and 3038–0081 will be cancelled. Changes to the existing information collection requirements as a result of this proposal are set forth below. 1. Subpart A—General Requirements Applicable to DCOs Subpart A establishes the procedures and information required for applications for registration as a DCO, including submission of a completed Form DCO accompanied by all applicable exhibits. Form DCO is covered by OMB control number 3038– 0076. Currently, collection 3038–0076 reflects that there are 3 applicants for DCO registration annually and that it takes 400 hours to complete and submit the form, including all exhibits. The Commission is reducing the number of potential applicants for DCO registration to two annually, based on recent numbers of applications filed. The Commission is proposing to modify and update Form DCO to conform it to the proposed revisions to part 39. Additionally, the Commission is proposing to apply certain governance requirements applicable to SIDCOs and subpart C DCOs to all DCOs. This necessitates moving the corresponding burden hours from the subpart C Election Form to Form DCO. Specifically, 22 burden hours per respondent for the subpart C Election Form—Exhibits A through G, currently under OMB control number 3038–0081, would transfer to the Form DCO burden per respondent in OMB control number 3038–0076. The proposal would eliminate the requirement for DCOs to use Form DCO to request an amended order of DCO 78 The four collections are: OMB Control No. 3038–0066, Financial Resources Requirements for Derivatives Clearing Organizations; OMB Control No. 3038–0081, General Regulations and Derivatives Clearing Organizations; OMB Control No. 3038–0069, Information Management Requirements for Derivatives Clearing Organizations; and OMB Control No. 3038–0076, Risk Management Requirements for Derivatives Clearing Organizations. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 registration. The Commission estimates the burden hours per respondent would decrease by one hour due to the proposed change to § 39.3(a)(2) that would no longer require a DCO seeking to amend its order of registration to submit Form DCO. The new aggregate proposed estimate for Form DCO is as follows: Form DCO—§ 39.3(a)(2) Estimated number of respondents: 2. Estimated number of reports per respondent: 1. Average number of hours per report: 421. Estimated gross annual reporting burden: 842. The Commission also is proposing to amend certain existing provisions of § 39.3 regarding requests for extension of the review of a DCO application, vacation of a DCO’s registration, and transfer of positions. The Commission is proposing to adopt new § 39.3(a)(6), which would permit the Commission to extend the 180-day review period for DCO applications specified in § 39.3(a)(1) for any period of time to which the applicant agrees in writing. Although this is not a new practice, it was not previously accounted for separately in this information collection. The Commission is estimating that there would be two requests for extension of the DCO application per year, one per respondent, and that it will take one hour per report. The new aggregate proposed estimate for the agreement in writing to extend the application review period pursuant to § 39.3(a)(6) is as follows: Estimated number of respondents: 2. Estimated number of reports per respondent: 1. Average number of hours per report: 1. Estimated gross annual reporting burden: 2. The Commission is proposing to amend § 39.3(e) to codify statutory requirements regarding vacation of registration. The proposed changes would specify information that a DCO must include in its request to vacate, and require a DCO to continue to maintain its books and records after its registration has been vacated for the requisite statutory and regulatory retention periods. The Commission estimates that there would be one request to vacate every three years and that it would take three hours per report. The annual aggregate burden for the request to vacate requirement has been divided to reflect the estimate of one request to vacate a DCO registration PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 pursuant to § 39.3(e)(1) every three years as follows: Estimated number of respondents: 1. Estimated number of reports per respondent: 0.33. Average number of hours per report: 1. Estimated gross annual reporting burden: 1. For recordkeeping by a DCO that has requested to vacate its registration, the Commission is adding this recordkeeping burden to OMB control number 3038–0076, which currently includes 16 responses and 50 burden hours for the recordkeeping requirement of registered DCOs. The Commission is also transferring the 100 recordkeeping burden hours currently contained in OMB control number 3038–0069 to OMB control number 3038–0076. The burden for the request to vacate requirement has been divided to reflect the estimate of one record of the request to vacate a DCO registration pursuant to § 39.3(e)(1) every three years. The combined annual aggregate recordkeeping burden estimate for subparts A and B of part 39 under OMB control number 3038–0076 is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 1. Average number of hours per report: 150. Estimated number of respondentsrequest to vacate: 1. Estimated number of reports per respondent-request to vacate: 0.33. Average number of hours per reportrequest to vacate: 1. Estimated gross annual recordkeeping burden: 2,401.79 The Commission is proposing changes to § 39.3(f), to be renumbered as § 39.3(g), to simplify the requirements for requesting a transfer of open interest. The rule submission filing is covered by OMB control number 3038–0093, which reflects that there are 50 reports annually and that it takes two hours per response. The Commission is of the view that to the extent that the transfer of open interest request would be submitted as part of a new rule or rule amendment filing pursuant to § 40.5, the proposed change is already covered by OMB control number 3038–0093 and there is no change in the burden estimates. 79 The total annual recordkeeping burden estimate reflects the combined figures for 16 registered DCOs with an annual burden of one response and 150 hours per response (16 × 1 × 150 = 2,400), and one vacated DCO registration every three years with an annual burden of one hour. E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 2. Subpart B—Requirements for Compliance With Core Principles a. CCO Annual Reporting Requirements—§ 39.10(c) Currently, § 39.10(c)(3) requires the CCO of a DCO to prepare, and to submit to the Commission and the DCO’s board of directors, an annual compliance report containing specified information regarding the DCO’s compliance with the core principles and Commission regulations. The burden for CCO annual reports, which is currently covered by OMB control number 3038–0081, is being moved to OMB control number 3038–0076. OMB control number 3038– 0081 reflects that there are 12 respondents that submit CCO annual reports annually and that it takes 80 hours to complete and submit the report, and 960 hours in the aggregate. The number of respondents is being updated to 16 to reflect the current number of registered DCOs. The Commission is proposing to allow a DCO to incorporate by reference certain sections of prior annual compliance reports. Specifically, if the sections of the CCO annual report that describe the DCO’s compliance policies and procedures have not materially changed, the current report may reference a prior year’s report, provided that the referenced report was filed within the prior five years. The Commission estimates that this change should decrease the burden of preparing the CCO annual report by ten hours per respondent, and 160 hours in aggregate, by not requiring the report to repeat potentially lengthy descriptions of policies and procedures that have already been adequately described in a CCO annual report previously submitted to the Commission. The Commission is proposing to specify that the CCO annual report must identify, by name, rule number, or other identifier, the policies and procedures intended to comply with each core principle and applicable regulation. The Commission estimates the proposed change would add two hours to the burden of preparing each report, and 32 hours in the aggregate. Lastly, the Commission is proposing to amend § 39.10(c)(4) to require that the CCO annual report describe the process by which the report is submitted to the DCO’s board or senior officer. This requirement would require DCOs to memorialize in the report a process they are already required to follow. Nonetheless, the Commission anticipates an increase of one hour in the burden for each report, and 16 hours in the aggregate due to this proposed change. Overall, the Commission VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 estimates that the net impact of these increases and reductions to the CCO annual report burden due to the proposed changes is expected to be a decrease of seven hours per respondent in the existing information collection burden associated with the CCO annual report.80 The aggregate proposed estimate for the CCO annual report is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 1. Average number of hours per report: 73. Estimated gross annual reporting burden: 1,168. b. Cross-Margining Programs The Commission is proposing to add § 39.13(i), which would set forth the procedure for DCOs to submit information related to their proposed cross-margining programs with other DCOs (or other clearing organizations). Proposed § 39.13(i) would specify the information that a DCO would need to provide to the Commission regarding its cross-margining program and require that the DCO submit this information as part of a rule filing submitted for Commission approval pursuant to § 40.5. The rule submission filing is covered by OMB control number 3038– 0093, which reflects that there are 50 reports annually and that it takes 2 hours per response. The Commission is of the view that to the extent that the cross-margining program would be submitted as part of a new rule or rule amendment filing pursuant to § 40.5, the proposed changes is already covered by OMB control number 3038–0093 and there is no change in the burden estimates. c. Financial Resources Reporting i. Annual Financial Reports Existing § 39.11(f) requires DCOs to provide to the Commission quarterly reports of their financial resources, and § 39.19(c)(3) requires DCOs to prepare and submit audited annual financial statements. The Commission is proposing to add § 39.11(f)(2), which would incorporate in § 39.11 the annual reporting requirement that currently 80 The existing burden estimate for the CCO annual report is 80 hours per response. For the new estimate, the Commission is subtracting ten hours for the proposal not to require restatement of information that has not changed from the prior report, adding two hours for the proposal to require references to rules and policies, and one hour for the proposal to require that the report include documentation of the process of providing the report to the board, for a net burden per respondent of 73 hours. The recordkeeping burden is covered by OMB Control No. 3038–0076 and it is not affected by the proposal. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 22249 exists in § 39.19(c)(3). This change simply moves the existing requirement to a different location, and does not alter the existing information collection burden associated with this requirement. Accordingly, the burden for annual financial reports is being moved from OMB control number 3038– 0069 to OMB control number 3038– 0076, and the burden for quarterly financial reports is being moved from OMB control number 3038–0066 to OMB control number 3038–0076. The Commission is cancelling OMB control numbers 3038–0069 and 3038–0066. The Commission also is proposing to require in § 39.11(f)(2) that, concurrently with filing the required annual financial report, a DCO also provide: (1) A reconciliation, including appropriate explanations, of its balance sheet in the certified annual financial statements with the DCO’s most recent quarterly report when material differences exist or, if no material differences exist, a statement so indicating, and (2) such further information as may be necessary to make the required statements not misleading. The Commission estimates that the proposed change would add an additional 20 hours per report, and 320 hours in the aggregate, to the current burden of 2,606 hours per respondent, and 41,696 hours, in OMB control number 3038–0069, which as noted above, is being moved to OMB control number 3038–0076. Finally, the Commission is proposing in § 39.11(f)(2)(i) that the annual report be required to identify the DCO’s own capital allocated to the DCO’s compliance with § 39.11(a)(1), and also identify each of the DCO’s financial resources allocated to the DCO’s compliance with § 39.11(a)(2). The Commission estimates that the proposed change would add an additional 14 hours per report and 224 hours in the aggregate to the current burden of 2,606 hours per respondent, and 41,696 hours, in OMB control number 3038–0069, which as noted above, is being moved to OMB control number 3038–0076. The Commission estimates that the aggregate result of these changes will be to increase the information collection burden associated with annual financial reports from 2,606 hours to 2,640 hours for each DCO. The revised estimated aggregate burden for the audited annual financial statements is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 1. Average number of hours per report: 2,640. Estimated gross annual reporting burden: 42,240. E:\FR\FM\16MYP2.SGM 16MYP2 22250 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules ii. Quarterly Financial Reports The Commission is proposing to remove from § 39.11(f)(3) the requirement that certain documentation be filed quarterly; instead, DCOs would only need to include the information in their first quarterly report submission and upon any subsequent change, for an expected reduction of three hours per report. Proposed § 39.11(f)(1)(v) would require a DCO to identify in its quarterly report the financial resources allocated to meeting its obligations under § 39.11(a)(1) and (2), with an expected increase of one hour per report. The Commission has adjusted the existing burden hours for quarterly reporting to reflect these proposed changes, which result in an overall reduction in burden of two hours per report from the total estimated burden reflected in OMB control number 3038–0066. The estimated aggregate burden for the quarterly reports, as amended by the proposal is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 4. Average number of hours per report: 8. Estimated gross annual reporting burden: 512. The Commission is also proposing to amend § 39.11(f)(1)(ii), which requires a DCO to file with the Commission a financial statement of the DCO or of its parent company. The Commission is proposing to amend § 39.11(f)(1)(ii) to require that the financial statement provided be that of the DCO and not the parent company. The Commission is further proposing to amend the periodic financial reporting requirements in § 39.11(f)(1)(ii) and (f)(2)(i) to permit quarterly and annual financial statements to be prepared in accordance with U.S. GAAP for DCOs incorporated or organized under U.S. law and in accordance with either U.S. GAAP or IFRS for DCOs incorporated or organized under the laws of any foreign country. These changes are not expected to affect the burden. khammond on DSKBBV9HB2PROD with PROPOSALS2 d. Daily Reporting The Commission is proposing to amend § 39.19(c)(1)(i)(A)–(C), which requires a DCO to report margin, cash flow, and position information by house origin and separately by customer origin, to report this information by individual customer account as well. The Commission is also proposing to amend § 39.19(c)(1)(i)(D) to specify that, with respect to end-of-day position information, DCOs must report both unadjusted and risk-adjusted position information. The burden associated VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 with these proposed changes is anticipated to result in an increase from 0.1 to 0.5 hours per report, and 2,000 in the aggregate. The burden increase for daily financial reports is being moved from OMB control number 3038–0069 to OMB control number 3038–0076. Separately, the Commission is proposing changes to § 39.19(c)(1)(i) that would codify relief previously granted to fully-collateralized DCOs that would reduce their daily reporting burden by not requiring information on initial margin, daily variation margin payments, other daily cash flows, and end-of-day positions. The proposed change would reduce the burden for fully-collateralized DCOs, but would not affect the burden for the majority of DCOs that are subject to daily reporting requirements. The revised aggregate burden estimate for daily reporting being transferred to OMB control number 3038–0076 is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 250. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 2,000. The Commission is proposing amendments to § 39.13(g)(8)(i)(B) to require a DCO to have rules requiring its clearing members to report customer information about futures (as well as swaps) to DCOs. This is a new information collection that is not covered by an existing OMB control number. The burden applicable to clearing members is estimated as follows: Estimated number of respondents: 64. Estimated number of reports per respondent: 250. Average number of hours per report: 0.2. Estimated gross annual reporting burden: 3,200. e. Event-Specific Reporting Regulations 39.18(g) and (h) require a DCO to provide notice regarding certain exceptional events or planned changes related to a DCO’s automated systems. These notice requirements are incorporated by reference in § 39.19(c)(4). Regulation 39.19(c)(4) also requires a DCO to notify the Commission of the occurrence of other specified events; for example, a decrease in financial resources or the default of a clearing member. The information collection burden associated with these notices required under § 39.19(c)(4) is currently addressed by OMB Control No. 3038–0069, but is being moved to OMB control number 3038–0076 and consolidated with the burden in OMB PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 control number 3038–0076 that is currently associated with § 39.18(g) and (h). In addition, the Commission is proposing to add to § 39.19(c)(4) several events for which DCOs will be required to provide notification if such events occur. The Commission is also proposing to amend § 39.16(c)(2)(ii) to require that a DCO provide immediate public notice of a declaration of default on its website. The estimated burden of proposed § 39.16(c)(2)(ii) is included in the estimate for event-specific reporting because it would occur concurrently with the requirement under § 39.19(c)(4)(vii) that a DCO provide immediate notice to the Commission regarding the default of a clearing member. The burden associated with these proposed changes pursuant to § 39.19(c)(4) is anticipated to result in an increase in the number of reports by DCO per year on average, from four to 20, and a reduction in the hour burden per response, which was previously overstated, from six to 0.5 hours, because a DCO is required to provide a brief notice with only the pertinent details of the incident. The aggregate revised burden estimate of § 39.19(c)(4) being transferred to OMB control number 3038–0076 is as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 20. Average number of hours per report: 0.5. Estimated gross annual reporting burden: 160. f. Public Information The Commission is proposing to revise § 39.21 to clarify that information regarding the financial resource package available in the event of a clearing member default, which a DCO is required to post on its website pursuant to § 39.21, should be updated at least quarterly, consistent with the requirement in § 39.11(f)(1)(i)(A) to report this information to the Commission each fiscal quarter or at any time upon Commission request. The Commission is also clarifying that other information specified in § 39.21 must be disclosed separately on the DCO’s website, and not provided solely in the DCO’s posted rulebook. This is a new information collection that is not covered by an existing OMB control number. The proposed changes are estimated to add an average of two hours per response, and eight hours per respondent annually (4 quarterly reports × 2 hours per report) to OMB control number 3038–0076, for an aggregate estimated burden as follows: E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules Estimated number of respondents: 16. Estimated number of reports per respondent: 4. Average number of hours per report: 2. Estimated gross annual reporting burden: 128. g. Governance As noted above, the Commission is proposing to incorporate governance provisions from subpart C, which only applies to a limited subset of DCOs, into subpart B, which is applicable to all DCOs. Therefore, the information collection burden currently associated with the governance standards of § 39.32, which results from required disclosure of major board decisions and governance arrangements, has been reallocated to § 39.24. The burden associated with subpart C governance provisions, which is currently covered by OMB control number 3038–0081, is being moved to OMB control number 3038–0076. The aggregate burden of these requirements would increase because they will be applicable to all registered DCOs. The new aggregate burden estimate for proposed § 39.24 that is associated with the required ongoing disclosure of major board decisions and governance arrangements by registered DCOs, including DCOs that are not currently subject to subpart C, is estimated as follows: Estimated number of respondents: 16. Estimated number of reports per respondent: 6. Average number of hours per report: 3. Estimated gross annual reporting burden: 288. khammond on DSKBBV9HB2PROD with PROPOSALS2 h. Legal Risk Proposed changes to § 39.27 would require a DCO that provides clearing services outside the United States to ensure that the legal opinion that a DCO must obtain to provide those services is accurate and up to date. The new subsection also requires the DCO to submit an updated legal memorandum to the Commission following all material changes to the analysis or content contained in the memorandum. This requirement would apply only to DCOs offering clearing services outside the U.S. This is a new information collection that is not covered by an existing OMB control number. The Commission expects that circumstances necessitating submission of an updated legal memorandum will occur infrequently, not more than once every three years, and has estimated the aggregate burden as follows: Estimated number of respondents: 1. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Estimated number of reports per respondent: 0.33. Average number of hours per report: 20. Estimated gross annual reporting burden: 6.6. 3. Subpart C—Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject to the Provisions of Subpart C Because the Commission is proposing to remove and reserve § 39.32 and Exhibit B of the subpart C Election Form and to move the governance requirements to Form DCO and § 39.24, the corresponding information collection burden under § 39.32, currently covered by OMB control number 3038–0081 would be eliminated and the burden under the subpart C Election Form would be reduced. Further, in consolidating the burden for subpart C, currently in OMB control number 3038–0081, with OMB control number 3038–0076, the Commission has reassessed the burden for the subpart C Election Form, and is adjusting certain burden hour estimates and numbers of respondents. Specifically, the Commission is reducing the number of burden hours estimated for the certification portion of the subpart C Election Form from 25 hours to 2 hours, because the prior estimate overstated the burden necessary to prepare the onepage certification. The burden that is currently estimated separately for the certifications, exhibits, and supplements/amendments to the subpart C Election Form have been combined because a DCO must provide all the required information in order to submit a complete subpart C Election Form.81 Additionally, the Commission is proposing to update the estimated numbers of respondents for subpart C to reflect the current number of SIDCOs and subpart C DCOs, and a reduction, from five to one, in the anticipated number of DCOs newly electing to be subject to subpart C. The Commission is also updating the number of responses for the rescission notices that must be provided to clearing members based on an average of the current number of clearing members at subpart C DCOs. The Commission also is combining 81 The current burden for the subpart C Election Form exhibits is 155 hours per response; 22 of these hours are being moved to the Form DCO burden as discussed in the Form DCO section above, leaving 133 hours. Also, the Commission is reducing the burden currently attributed to amendments to the subpart C Election Form and consolidating it with the burden for supplemental information because in practice, DCOs have not frequently filed amendments. Consolidating the certification (2 hours), exhibits (133 hours), and supplemental or amended information (45 hours) results in a burden of 180 hours. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 22251 burden estimates that previously were estimated separately for SIDCOs only and for all subpart C DCOs; that distinction was made in the initial implementation of subpart C but is no longer necessary since the subpart C rules have been in place for several years. The revised estimated aggregate reporting burden related to the subpart C Election Form, notices and disclosure being transferred to OMB control number 3038–0076 is as follows: Subpart C Election Form Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 180. Estimated gross annual reporting burden: 180. Subpart C Withdrawal Notice Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 2. Estimated gross annual reporting burden: 2. Subpart C Rescission Notice Estimated number of respondents: 1. Estimated number of reports per respondent: 16. Average number of hours per report: 3. Estimated gross annual reporting burden: 48. PFMI Disclosures Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 200. Estimated gross annual reporting burden: 200. Quantitative Disclosures Estimated number of respondents: 1. Estimated number of reports per respondent: 1. Average number of hours per report: 80. Estimated gross annual reporting burden: 80. Additionally, the Commission is proposing to add to § 39.37 a notification requirement regarding changes to the PFMI disclosure framework for SIDCOs and subpart C DCOs, which is expected to increase, by one hour, the existing information collection burden of 80 hours per response. The aggregate estimated burden for § 39.37 is stated below: Subpart C Disclosure Framework Requirements—§ 39.37 Estimated number of respondents: 9. E:\FR\FM\16MYP2.SGM 16MYP2 22252 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules Estimated number of reports per respondent: 1. Average number of hours per report: 81. Estimated gross annual reporting burden: 729. Because the Commission is moving all of the burden estimates for subpart C from OMB control number 3038–0081 to OMB control number 3038–0076 and cancelling information collection 3038– 0081, the existing burden estimates for §§ 39.33, 39.36, 39.38, and 39.39, and certain disclosures under § 39.37, as updated to reflect the current number of SIDCOs and subpart C DCOs, are restated below. In addition, for the quantitative disclosures required under § 39.37, which may be updated as frequently as quarterly, the Commission has updated the number of reports per respondent from one to four annually, and has distributed the existing 35 burden hours among the four reports (35/4 = 8.75, rounded to 9). The updated subpart C reporting burden estimates for the changes to subpart C—Provisions is as follows: Subpart C Financial and Liquidity Resource Documentation—§ 39.33 Estimated number of respondents: 9. Estimated number of reports per respondent: 1. Average number of hours per report: 120. Estimated gross annual reporting burden: 1080. Subpart C Stress Test Results—§ 39.36 Estimated number of respondents: 9. Estimated number of reports per respondent: 16. Average number of hours per report: 14. Estimated gross annual reporting burden: 2016. Subpart C Quantitative Disclosures— § 39.37 khammond on DSKBBV9HB2PROD with PROPOSALS2 Estimated number of respondents: 9. Estimated number of reports per respondent: 4. Average number of hours per report: 9. Estimated gross annual reporting burden: 324. Subpart C Transaction, Segregation and Portability Disclosures—§ 39.37 Estimated number of respondents: 9. Estimated number of reports per respondent: 1. Average number of hours per report: 35. Estimated gross annual reporting burden: 315. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Subpart C Efficiency and Effectiveness Review—§ 39.38 Estimated number of respondents: 9. Estimated number of reports per respondent: 1. Average number of hours per report: 3. Estimated gross annual reporting burden: 27. Subpart C Recovery and Wind-down Plan—§ 39.39 Estimated number of respondents: 9. Estimated number of reports per respondent: 1. Average number of hours per report: 480. Estimated gross annual reporting burden: 4,320. With respect to the subpart C recordkeeping burden that the Commission is moving from OMB control number 3038–0081 to OMB control number 3038–0076, the Commission also has combined the burden estimates for financial and liquidity resources, and liquidity resource due diligence and testing because these requirements apply to the same set of respondents. As noted above, the general recordkeeping requirements that were previously estimated separately for SIDCOs and all subpart C DCOs also have been combined. The updated subpart C recordkeeping burden estimates are restated below: Subpart C Recordkeeping—General Estimated number of respondents: 9. Estimated number of reports per respondent: 110. Average number of hours per report: 10. Estimated gross annual recordkeeping burden: 9,900. Subpart C Recordkeeping—Financial and Liquidity Resources, Liquidity Resource Due Diligence and Testing Estimated number of respondents: 9. Estimated number of reports per respondent: 8. Average number of hours per report: 10. Estimated gross annual recordkeeping burden: 720. Request for Comment The Commission invites the public and other Federal agencies to comment on any aspect of the proposed information collection requirements discussed above. The Commission will consider public comments on this proposed collection of information in: (1) Evaluating whether the proposed collection of information is necessary for the proper performance of the PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 functions of the Commission, including whether the information will have a practical use; (2) Evaluating the accuracy of the estimated burden of the proposed collection of information, including the degree to which the methodology and the assumptions that the Commission employed were valid; (3) Enhancing the quality, utility, and clarity of the information proposed to be collected; and (4) Minimizing the burden of the proposed information collection requirements on registered entities, including through the use of appropriate automated, electronic, mechanical, or other technological information collection techniques, e.g., permitting electronic submission of responses. Copies of the submission from the Commission to OMB are available from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 20581, (202) 418–5160 or from http:// RegInfo.gov. Organizations and individuals desiring to submit comments on the proposed information collection requirements should send those comments to: • The Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Desk Officer of the Commodity Futures Trading Commission; • (202) 395–6566 (fax); or • OIRAsubmissions@omb.eop.gov (email). Please provide the Commission with a copy of submitted comments so that all comments can be summarized and addressed in the final rulemaking, and please refer to the ADDRESSES section of this rulemaking for instructions on submitting comments to the Commission. OMB is required to make a decision concerning the proposed information collection requirements between 30 and 60 days after publication of this release in the Federal Register. Therefore, a comment to OMB is best assured of receiving full consideration if OMB receives it within 30 calendar days of publication of this release. Nothing in the foregoing affects the deadline enumerated above for public comment to the Commission on the proposed rules. C. Cost-Benefit Considerations 1. Introduction Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules CEA or issuing certain orders.82 Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors (collectively referred to herein as section 15(a) factors). The Commission has not identified any impact that the proposed changes to part 39 would have on price discovery. The impact the proposed changes to part 39 would have on the other section 15(a) factors is considered below. The Commission recognizes that the proposed rules may impose costs. The Commission has endeavored to assess the expected costs and benefits of the proposed rulemaking in quantitative terms, including PRA-related costs, where possible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable proposed rules in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the proposed rules. Additionally, the initial and recurring compliance costs for any particular DCO will depend on the size, existing infrastructure, level of clearing activity, practices, and cost structure of the DCO. The Commission notes that this consideration is based on its understanding that centralized clearing activity functions internationally with (i) clearing activity that involves U.S. firms occurring across different international jurisdictions; (ii) some entities organized outside the U.S. that are prospective or current Commission registrants; and (iii) some entities typically operating both within and outside of the U.S. who follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, its discussion of costs and benefits refers to the effects of the proposed rules on all activity subject to it, whether by virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with or effect on U.S. commerce under section 2(i) of the CEA. In particular, the Commission notes that some DCOs 82 7 U.S.C. 19(a). VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 subject to the proposed rules are located outside of the United States. The Commission generally requests comment on all aspects of its costbenefit considerations, including the identification and assessment of any costs and benefits not discussed herein; the potential costs and benefits of the alternatives discussed herein; data and any other information to assist or otherwise inform the Commission’s ability to quantify or qualitatively describe the costs and benefits of the proposed rules; and substantiating data, statistics, and any other information to support positions posited by commenters with respect to the Commission’s discussion. The Commission welcomes comment on such costs, particularly from existing DCOs that can provide quantitative cost data based on their respective experiences. Commenters may also suggest other alternatives to the proposed approach. 2. Baseline The baseline for the Commission’s consideration of the costs and benefits of this proposed rulemaking are: (1) The DCO Core Principles set forth in section 5b(c)(2) of the CEA; (2) the general provisions applicable to DCOs under subparts A and B of part 39 of the Commission’s regulations; (3) the Commission’s regulations in subpart C of part 39, which establish additional standards for compliance with the core principles for those DCOs that are designated as SIDCOs or have elected to opt-in to the subpart C requirements in order to achieve status as a QCCP; (4) Form DCO in appendix A to part 39; (5) subpart C Election Form in appendix B to part 39; and (6) §§ 1.20(d) and 140.94. The Commission notes that some of the proposed rules would codify existing no-action relief and other guidance issued by Commission staff. To the extent that market participants have relied upon such relief or staff guidance, the actual costs and benefits of the proposed rules, as discussed in this section of the proposal, may not be as significant. 3. Written Acknowledgment From Depositories—§ 1.20 a. Benefits Regulation 1.20(d)(1) requires an FCM to obtain a written acknowledgment from each depository with which the FCM deposits futures customer funds. The regulation provides that an FCM is not required to obtain a written acknowledgment from a DCO that has adopted rules providing for the segregation of customer funds, but other PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 22253 provisions of § 1.20(d) seem to suggest that a DCO must provide the written acknowledgment regardless. The Commission is proposing to amend § 1.20(d) to clarify the Commission’s intent that the requirements listed in § 1.20(d)(3) through (6) do not apply to a DCO, or to an FCM that clears through that DCO, if the DCO has adopted rules that provide for the segregation of customer funds. The Commission believes this will benefit FCMs and DCOs by reducing uncertainty as to when an FCM must obtain a written acknowledgment from a DCO. b. Costs The Commission does not believe the proposed amendment would impose any additional costs on DCOs or FCMs, as it is clarifying the circumstances under which an acknowledgment letter would not be required. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(B) of the CEA, the Commission believes that the proposed amendments to § 1.20(d) would not negatively impact the protection of market participants and the public, including DCOs’ clearing members and their customers, as the proposed amendment merely clarifies the instances in which a DCO, or an FCM that clears through that DCO, would not need to file an acknowledgment letter because the DCO has adopted rules that provide for the segregation of customer funds. The Commission believes that the proposed amendment to § 1.20(d) will result in an incremental increase in efficiency for FCMs that follows from reducing any previous uncertainty regarding when they must obtain an acknowledgement letter. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendment. 4. Definitions—§ 39.2 Regulation 39.2 sets forth definitions applicable to terms used in part 39 of the Commission’s regulations. The Commission is proposing amendments to the definition of ‘‘business day,’’ ‘‘customer,’’ ‘‘customer account or customer origin,’’ and ‘‘key personnel’’ in § 39.2 to maintain consistency with terms defined elsewhere in Commission regulations and to provide clarity with respect to the use of these terms. The Commission is also adding new definitions for ‘‘enterprise risk E:\FR\FM\16MYP2.SGM 16MYP2 22254 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules management’’ and ‘‘fully-collateralized position’’ to correspond with amendments that the Commission is proposing elsewhere in part 39. a. Benefits The Commission believes the proposed amendments to § 39.2 would benefit DCOs by clarifying existing part 39 requirements, such as what constitutes a Federal holiday for purposes of applying the definition of ‘‘business day.’’ The Commission believes the newly proposed definitions in § 39.2 for ‘‘enterprise risk management’’ and ‘‘fully-collateralized positions’’ are necessary to understanding the proposed rules for an enterprise risk management framework in proposed § 39.10(d) and proposed exceptions from several requirements for fully-collateralized positions throughout part 39. The proposed amendments to the definitions of ‘‘customer’’ and ‘‘customer account or customer origin’’ would also help to avoid conflicts with similar terms defined in § 1.3. khammond on DSKBBV9HB2PROD with PROPOSALS2 b. Costs The Commission does not believe the proposed new and amended definitions would impose additional costs on DCOs, as they are not imposing additional requirements, but rather defining terms that are used in other provisions. c. Section 15(a) Factors In addition to the discussion above, the Commission evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. The Commission believes that DCOs may experience a modest increase in efficiency as a result of the proposed amendments. In consideration of section 15(a)(2)(B) of the CEA, the Commission believes that, to the extent that the amended definitions provide clarity, reduce any previous uncertainty, or help to avoid conflicts with similar terms that are defined in different sections, these effects, individually and in aggregate, may yield increased efficiency. For example, the Commission believes the proposed amendments to the definition of ‘‘business day’’ in § 39.2 will better enable DCOs, particularly those located outside of the United States, to easily identify Federal holidays as it relates to their compliance with applicable reporting requirements under part 39. The proposed amendments to § 39.2 would also provide foreign DCOs with greater clarity by excluding ‘‘foreign holidays’’ from the definition of ‘‘business day,’’ thereby eliminating the VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 requirement to report to the Commission on a non-trading day. After considering the other section 15(a) factors, the Commission believes they are not implicated by the proposed amendments. 5. Procedures for Registration—§ 39.3 and Form DCO The Commission is proposing several changes to its procedures for DCO registration, including: The manner by which a DCO applicant would file supplemental information in proposed § 39.3(a)(3); procedures in proposed § 39.3(a)(4) to amend a pending application; the potential for an extension of the application review period in proposed § 39.3(a)(6); and the procedures for filing a request for an amended order of registration in proposed § 39.3(d). The Commission is also proposing to codify the statutory requirements in section 7 of the CEA to vacate an order of registration as well as specify the types of information that a DCO must provide to the Commission in this regard in proposed § 39.3(f); and clarify the types of information that a DCO must provide to request a transfer of open interest in proposed § 39.3(g). In addition, the Commission is proposing to revise Form DCO to correspond with proposed amendments to part 39 and to reflect Commission staff’s experience with DCO applications. a. Benefits The Commission believes the proposed amendments to the DCO registration procedures in § 39.3 and Form DCO will make the procedures more transparent to applicants. This should allow prospective DCO applicants to more efficiently prepare complete applications, which should reduce the need for Commission staff to request additional information after receiving the application and therefore reduce the overall time needed to review an application. For example, the Commission is modifying Form DCO to clarify the types of information that are required and align the exhibits with the amendments proposed under part 39. These proposed amendments may reduce an applicant’s time and resources used in responding to staff inquiries during the application review process, as DCO applicants would be better able to provide more complete, accurate, and nuanced application materials. The proposed amendments to § 39.3 would also adapt certain language to better reflect terminology applicable to DCOs in proposed § 39.3(a)(1) and (2) and (b), which could help to avoid confusion for potential DCO applicants and existing DCOs. Furthermore, the PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 Commission is proposing to codify its long-standing procedures for staying an application in proposed § 39.3(a)(6) to provide DCO applicants with greater transparency of the registration process. The Commission is proposing to amend § 39.3(a)(2) and Form DCO to eliminate the required use of Form DCO to request an amended order of registration from the Commission. This change would better reflect current practice, where a DCO is permitted to file a request for an amended order with the Commission rather than submitting Form DCO. Similarly, the Commission is proposing to specify in proposed § 39.3(f) the types of information that the Commission currently requests to determine whether to vacate an order of registration, which would provide DCOs with more transparency as to the types of information that are required as part of a request to vacate an order of registration. The proposed recordkeeping requirements in § 39.3(f)(1)(iii) and (iv), which would require a vacated DCO to continue to maintain the books and records that it would otherwise be required to maintain as a registered DCO, would provide the benefit of ensuring that a DCO does not vacate its registration and destroy its books and records in order to hinder or avoid Commission action. The Commission also proposes to streamline the procedures for requesting a transfer of open interest by separating those procedures in existing § 39.3(g) from the procedures to notify the Commission of a DCO corporate structure or ownership change. Under the proposed amendments to § 39.3(g), a DCO seeking to transfer its open interest would be required to submit rules for Commission approval pursuant to § 40.5, rather than submitting a request for an order at least three months prior to the anticipated transfer. This would simplify the existing requirements and permit the transfer to take effect after a 45-day Commission review period. The Commission believes the 45-day period would ensure that clearing members are made aware of the intended transfer and allow the Commission to determine whether the transferee DCO is suitable to accept the transfer. b. Costs The Commission believes DCOs would not incur any additional costs associated with the proposed procedures to request an amended order of registration in § 39.3(d), as a DCO would incur the same costs if requesting to amend its order of registration by E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules using the current Form DCO.83 As to the procedures to vacate a DCO’s registration in proposed § 39.3(f), the Commission believes the costs would not be substantial. Any costs incurred by DCOs would more likely be due to the proposed recordkeeping requirements in § 39.3(f)(1)(iii) and (iv), which would require a vacated DCO to continue to maintain the books and records that it would otherwise be required to maintain as a registered DCO pursuant to § 1.31(b). Finally, the Commission is proposing to amend § 39.3(g) to permit a DCO seeking to transfer its open interest to submit rules for Commission approval pursuant to § 40.5, rather than submitting a request for an order at least three months prior to the anticipated transfer. The Commission does not anticipate that DCOs would incur any additional costs as a result of these procedural changes beyond the costs to prepare a § 40.5 rule submission, which are likely to be similar to the costs of requesting an order approving the transfer. Additionally, the information requested in proposed § 39.3(g) reflects information that DCOs are already required to provide in order to transfer their open interest. The Commission does not believe DCOs would incur additional costs from any of the other proposed amendments to the DCO registration procedures in § 39.3. khammond on DSKBBV9HB2PROD with PROPOSALS2 c. Section 15(a) Factors In addition to the discussion above, the Commission evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. The Commission believes that the proposed changes to the registration procedures will maintain the protection of market participants and the public by ensuring that DCOs are in compliance with the DCO Core Principles and Commission regulations. The proposed changes would also increase efficiency by making the registration process more transparent. This would enable DCOs and DCO applicants to provide more complete documentation in a more concise manner, thereby reducing the time and resources needed to comply with such procedures. To the extent that the proposed changes to the registration procedures act to streamline the application process, as well as to establish the process for vacating a DCO’s registration, the net result of those changes would be a more efficient 83 The Commission estimates for PRA purposes that there would be a reduction in the burden incurred by DCOs, as discussed in section IX.B.1 above. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 process for registering as a DCO and for vacating that registration. Additionally, the Commission believes that the proposed amendments to § 39.3(g), which addresses a request to transfer a DCO’s open interest, will result in increased efficiency because the proposed amendments streamline and improve the existing process, as DCOs would be able to use the existing process under § 40.5, with which DCOs are already familiar and which requires a shorter review period. As a result, DCOs may obtain approval to transfer their open interest in a timelier manner, which may benefit their operational and business needs. To that end, the Commission believes that these changes will have a beneficial effect on the risk management practices of DCOs, inasmuch as the proposed changes may modestly reduce the risks that may accompany the transfer of open interest to another DCO. Moreover, the proposed recordkeeping requirements for vacated DCOs will protect market participants and the public by ensuring that a DCO does not vacate its registration and destroy its books and records in order to hinder or avoid Commission action. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 6. DCO Chief Compliance Officer— § 39.10(c) a. Benefits The Commission is proposing to amend § 39.10(c) to allow a DCO to have its CCO report to the senior officer responsible for the DCO’s clearing activities. This would provide DCOs with flexibility to structure the management and oversight of the CCO based on the DCO’s particular corporate structure, size, and complexity. This may increase efficiency, reduce costs, and improve the quality of the oversight of the CCO, as the senior officer overseeing the DCO’s clearing activities would be better positioned to provide day-to-day oversight of the CCO. The Commission is proposing to amend certain requirements in § 39.10(c) relating to the CCO annual report to permit DCOs to incorporate by reference, for up to five years, any descriptions of written policies and procedures that have not materially changed since they were described within the most recent CCO annual report. The ability to incorporate by reference the description of written policies and procedures in the CCO annual report could reduce the time and costs needed to prepare the CCO annual PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 22255 report.84 The Commission is also proposing to remove the requirement that the DCO submit the CCO annual report at the same time as the DCO’s fiscal year-end audited financial statement. This is consistent with the proposed change to § 39.19(c)(3)(iv), which would allow DCOs the flexibility to submit required annual reports and audited year-end financial statements when ready but not later than 90 days after the end of the DCO’s fiscal year. The proposed changes recognize that the DCO’s year-end audited financial statements are prepared separately from the CCO annual report and therefore would not need to be prepared and submitted together. b. Costs The Commission is proposing to amend § 39.10(c) to require that a DCO identify its compliance policies and procedures by name, rule number, or other identifier; describe the process by which the annual report was submitted to the board of directors or senior officer; and allow incorporation by reference in limited circumstances. The Commission notes that a number of DCOs already provide this information. Therefore, the Commission expects that the proposed changes to § 39.10(c) would not impose additional costs on those DCOs.85 c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) of the CEA, the Commission believes that certain of the proposed changes to § 39.10(c) will enhance the protection of market participants and the public. Specifically, the proposed changes to a CCO’s reporting lines, along with the added clarity regarding proper identification of the compliance policies and procedures in the CCO annual report, is anticipated to enhance the compliance function at DCOs, which may have the corresponding effect of improving the protections for market participants and the public. Additionally, in consideration of section 15(a)(2)(B) of the CEA, the proposed amendment to permit incorporation by reference in the CCO annual report will 84 The Commission estimates for PRA purposes that there would be a reduction in the burden incurred by DCOs, as discussed in section IX.B.2.a above. 85 The Commission estimates for PRA purposes that there would be a reduction in the burden incurred by DCOs, as discussed in section IX.B.2.a above. E:\FR\FM\16MYP2.SGM 16MYP2 22256 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules increase efficiency in preparing that report. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. khammond on DSKBBV9HB2PROD with PROPOSALS2 7. Enterprise Risk Management— § 39.10(d) a. Benefits The Commission is proposing § 39.10(d) to require a DCO to have a program of enterprise risk management that identifies and assesses sources of risk and their potential impact on the operations and services of the DCO and identify an enterprise risk officer. The Commission believes that requiring DCOs to establish and maintain an enterprise risk management program in proposed § 39.10(d) may encourage DCOs to strengthen their existing programs, especially if a DCO lacks an enterprise risk management program that is commensurate with industry best practices. This may benefit the resiliency of individual DCOs’ operations by requiring DCOs to proactively identify potential risks on an enterprise-wide basis beyond those that a DCO might otherwise identify pursuant to its compliance with specific requirements in part 39. Compliance with proposed § 39.10(d) by DCOs who are affiliated with other registered entities such as DCMs, SEFs, and SDRs could also benefit the financial markets more broadly, as risks identified and addressed by the DCO may also apply to their affiliates within the derivatives markets. Consistent with § 39.10(b), the Commission does not intend to be overly prescriptive by requiring specific standards and methodologies. Proposed § 39.10(d)(3) would require a DCO to follow generally accepted standards and industry best practices with respect to the development and ongoing monitoring of its enterprise risk management framework, assessment of the performance of the enterprise risk management program, and the management and mitigation of risk to the DCO. The Commission is mindful that best practices evolve and change over time and does not, therefore, wish to prescribe specific standards in its regulations. This flexibility would allow DCOs to continue to develop enterprise risk management programs in a manner best suited for their specific risk exposures, product types, customer bases, market segments, and organizational structures, among other things, as long as their programs meet the proposed minimum standards and any other legal and regulatory requirements. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 b. Costs The Commission has found that DCOs that proactively identify and manage foreseeable risks have generally implemented enterprise risk management frameworks, in whole or in part, to identify, assesses, and manage sources of risk in a manner similar to the requirements proposed in § 39.10(d)(1)–(4). Therefore, the Commission believes that any additional costs associated with these requirements should be minimal relative to existing industry practice for those DCOs whose enterprise risk management programs are commensurate with industry best practices. Additionally, as DCOs would be able to comply with this requirement by including the DCO in the enterprise risk management program administered by the DCO’s parent company or affiliate, the Commission believes any additional costs to comply with proposed § 39.10(d) could be reduced if the DCO is able to share the costs of compliance with its parent or affiliates. DCOs that do not have an enterprise risk management program in line with proposed § 39.10(d) or could not otherwise rely on its parent’s or affiliate’s enterprise risk management program would incur costs to implement such a program. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(D) of the CEA, the Commission believes that the proposal to require a DCO to have a formal enterprise risk management program will improve DCO risk management practices by ensuring that DCOs have a process for identifying and assessing potential risks to the DCO on an enterprise-wide basis, thereby enhancing protection of market participants and the public and the financial integrity of the derivatives markets. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 8. Financial Resources—§ 39.11 a. Benefits The Commission is proposing certain changes to § 39.11, including: Clarifying how a DCO’s largest financial exposure should be calculated in proposed § 39.11(c)(2); requiring a DCO to use the same stress test scenario to combine the customer and house stress test losses of PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 each clearing member in proposed § 39.11(c)(2)(ii); and requiring a DCO to adopt rules to specifically permit the netting of any gains in the house account with customer losses in the event of a member default (and prohibiting a DCO from netting losses in the house account with gains in the customer account consistent with section 4d of the CEA, which requires the segregation of customer funds) in proposed § 39.11(c)(2)(iii). The Commission believes these proposed adjustments to the methodology used to calculate a DCO’s financial resources requirement in § 39.11(c) would focus a DCO’s analysis on the resources that would actually be available to it during times of stress. This approach is consistent with recent guidance issued by CPMI–IOSCO suggesting that, when assessing the adequacy of their financial resources, CCPs should take into account only prefunded financial resources and ignore voluntary excess contributions. CCPs that wish to be considered QCCPs are expected to follow this guidance, so having Commission requirements that are consistent with the guidance would benefit DCOs. Regulation 39.11(d)(2) sets out certain conditions that apply to a DCO’s use of assessments for additional guaranty fund contributions in calculating the financial resources available to meet its obligations under § 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that a DCO shall only count the value of assessments, after a 30 percent haircut, ‘‘to meet up to 20 percent of those obligations.’’ The Commission proposes to amend § 39.11(d)(2) to replace the phrase ‘‘those obligations’’ with ‘‘the total amount required under paragraph (a)(1) of this section,’’ to provide DCOs with more clarity as to how to comply with this requirement. Furthermore, the Commission is proposing amendments to § 39.11(e)(1)(iii) and (e)(3) to clarify that a DCO may use a committed line of credit or similar facility, in whole or in part, to satisfy § 39.11(e)(1)(ii) or (e)(2), as long as the committed line of credit or similar facility is not counted twice to meet the requirements of § 39.11(e)(1)(ii) and (e)(2). This is a clarification of the existing requirement, which provides a DCO with additional flexibility to optimize the liquidity resources it holds, which would potentially reduce certain opportunity costs associated with holding more expensive types of liquid resources, such as cash. Regulation 39.11(f)(1)(ii) requires a DCO to file with the Commission a financial statement of the DCO or of its E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules parent company. The Commission is proposing to amend § 39.11(f)(1)(ii) to require that the financial statement provided be that of the DCO and not the parent company in order to better and more accurately assess the financial strength of the DCO. The Commission believes it would also benefit the DCO to be able to assess its compliance with Core Principle B and § 39.11 and its financial health separately from that of its parent. The Commission is proposing to amend the periodic financial reporting requirements in § 39.11(f)(1)(ii) and (f)(2)(i) to permit quarterly and annual financial statements to be prepared in accordance with U.S. GAAP for DCOs incorporated or organized under U.S. law and in accordance with either U.S. GAAP or IFRS for DCOs incorporated or organized under the laws of any foreign country. Although Commission regulations generally require financial statements to be prepared in accordance with U.S. GAAP, the Commission has permitted the use of IFRS by non-U.S. DCOs as a condition of each DCO’s registration order. The proposed rule would retain this flexibility for non-U.S. DCOs and provide greater transparency to DCOs and DCO applicants of the financial reporting requirements. In reviewing DCOs’ financial statements, Commission staff has noted that the DCO’s own capital allocated to meet the requirements of § 39.11(a)(1) or (2) often are not identified accordingly. The Commission therefore is proposing in § 39.11(f)(1)(ii) and (f)(2)(i) to require that assets allocated by the DCO for such purpose must be clearly identified on the DCO’s balance sheet as held for that purpose. As a result, DCOs would have the opportunity to more clearly demonstrate that they have satisfied the requirements of § 39.11(a)(1) or (2) and, in doing so, may avoid unnecessary follow-up questions from Commission staff. The Commission also is proposing to require in § 39.11(f)(2) that, in addition to its audited year-end financial statement, a DCO would be required to submit: (1) A reconciliation, including appropriate explanations, of its balance sheet when material differences exist between it and the balance sheet in the DCO’s financial statement for the last quarter of the fiscal year or, if no material differences exist, a statement so indicating, and (2) such further information as may be necessary to make the statements not misleading. Without such an explanation, Commission staff may be under the impression that the representations are false or incorrect. This requirement gives DCOs the opportunity to correct VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 any discrepancies and avoid unnecessary follow-up questions from Commission staff. Regulation 39.11(f)(3) requires a DCO to provide to the Commission documentation of the DCO’s financial resources methodology and basis for valuation and liquidity determinations as part of its quarterly financial reporting. The Commission is proposing to revise § 39.11(f)(3) to provide that a DCO must send this documentation to the Commission only upon the DCO’s first submission under § 39.11(f)(1) and in the event of any change thereafter. Not requiring this documentation to be provided each quarter could reduce a DCO’s reporting costs.86 The Commission is proposing to amend § 39.11(f)(4) to require that DCOs provide a certification as to the accuracy and completeness of the DCO’s quarterly financial report filed pursuant to proposed § 39.11(f)(1), annual report filed pursuant to proposed § 39.11(f)(2), and any other reports filed pursuant to proposed § 39.11(f)(3). The Commission believes a certification requirement will provide greater transparency with regard to the submission process and may increase the level of accountability at the DCO, which may lead to greater accuracy in reporting. b. Costs DCOs could incur initial costs to recalibrate the method by which they compute their financial resources to comply with proposed § 39.11(c). If a DCO does not have financial resources sufficient to comply with § 39.11(a)(1) based on its computation pursuant to proposed § 39.11(c), the DCO would have to procure additional financial resources. Because DCOs vary in terms of their size and level of clearing activity, the Commission believes they are better positioned to provide cost estimates in this regard. DCOs may incur costs to prepare their own financial statements (as opposed to financial statements of the parent company) in accordance with proposed § 39.11(f)(1)(ii). For DCOs that already prepare their own financial statements, incremental costs will not be as large as suggested by the regulatory baseline. DCOs may incur minimal costs in identifying in their balance sheet assets allocated to meet the requirements of § 39.11(a)(1) or (2). DCOs may also incur minimal costs to prepare a reconciliation of their balance sheet when material differences exist as 86 The Commission estimates for PRA purposes that there would be a reduction in the burden incurred by DCOs, as discussed in section IX.B.2.c.ii above. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 22257 compared to the DCO’s financial statement for the last quarter of the fiscal year. The Commission believes DCOs may incur additional costs associated with complying with the proposed certification requirements in § 39.11(f)(4). These costs may be reduced for DCOs that already provide them. The Commission recognizes that a DCO may have to develop a process in certifying its financial reports; however, the Commission believes that these costs may be reduced for DCOs to the extent that they already have this process in place.87 c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) of the CEA, the Commission believes that the proposed amendments to § 39.11 will result in improved protections for market participants and the public. Specifically, the proposed adjustments to the methodology used to calculate a DCO’s financial resources requirement in § 39.11(c) and the corresponding improvements to a DCO’s stress testing results are expected to enhance the safety and soundness of DCOs and their ability to manage their risks, thereby better protecting DCOs’ clearing members and their customers, market participants, and the public. Additionally, in further consideration of section 15(a)(2)(A) of the CEA, the proposal to require in § 39.11(f)(1)(ii) the financial statement of the DCO and not that of its parent company, is expected to better and more accurately assess the financial strength of the DCO, which will ultimately serve to protect market participants and the public and further the financial integrity of derivatives markets. In consideration of section 15(a)(2)(B) of the CEA, the Commission believes that, to the extent that the proposed amendments to § 39.11 will result in increased clarity or transparency, as explained above, those changes are anticipated to result in an incremental increase in efficiency. In consideration of section 15(a)(2)(D) of the CEA, the Commission believes the proposed adjustments to the methodology used to calculate a DCO’s financial resources requirement in § 39.11(c) would focus a DCO’s analysis on the resources that would actually be available to it during times of stress, thereby improving the DCO’s risk 87 See 17 CFR 228, 229, 232, 240, 249, 270 and 274. E:\FR\FM\16MYP2.SGM 16MYP2 22258 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules management practices. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 9. Participant and Product Eligibility— § 39.12 Regulation 39.12(b)(2) provides that a DCO shall adopt rules providing that all swaps with the same terms and conditions are economically equivalent within the DCO. As it was not the intention of the Commission to require DCOs that do not clear swaps to adopt the rules required under this provision, the Commission is proposing to revise § 39.12(b)(2) so that it explicitly applies only to DCOs that clear swaps. This could reduce rulebook drafting costs for future DCO applicants that do not intend to accept swaps for clearing. The Commission believes the proposed amendments to § 39.12 would not impose costs on DCOs or swaps market participants, as they would not be clearing swaps through a DCO that does not accept swaps for clearing. The Commission has considered the section 15(a) factors and believes that they are not implicated by these proposed amendments. 10. Risk Management—§ 39.13 khammond on DSKBBV9HB2PROD with PROPOSALS2 a. Benefits Regulation 39.13(g)(2)(i) requires that a DCO have initial margin requirements that are commensurate with the risks of each product and portfolio, including any unusual characteristics of, or risks associated with, particular products or portfolios. The regulation currently notes that such risks include but are not limited to jump-to-default risk or similar jump risk. The Commission is proposing to amend § 39.13(g)(2)(i) to note that such risks also include ‘‘concentration of positions.’’ Recent events, including a significant loss from a default at a central counterparty outside of the Commission’s jurisdiction, highlight the importance of addressing those risks. This change would serve to benefit DCOs and their clearing members by making the rule more explicit. Regulation 39.13(g)(3) requires a DCO to have its systems for initial margin requirements reviewed and validated by a qualified and independent party on a regular basis. The Commission is proposing to specify that ‘‘on a regular basis’’ means annually. Additionally, § 39.13(g)(3) provides that an employee of the DCO may conduct such independent validations as long as they are not responsible for the development or operation of the systems and models being tested. Proposed § 39.13(g)(3) VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 would expand the pool of eligible employees to include employees of an affiliate of the DCO, which would provide DCOs with greater flexibility in selecting appropriate staff to conduct the validations. Furthermore, the Commission is proposing new § 39.13(g)(7)(iii) to clarify that, in conducting back tests of initial margin requirements, a DCO should compare portfolio losses only to those components of initial margin that capture changes in market risk factors. This proposal would ensure that back testing of a DCO’s initial margin model is more appropriately calibrated. Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin on a gross basis for each clearing member’s customer account(s). Based on feedback received from DCOs, the Commission understands that there are significant operational issues that may affect the ability of clearing members to accurately determine the positions of individual customers on an intraday basis with respect to certain types of transactions (e.g., transfers, give-ups, and allocations of block orders) and with respect to certain types of market participants (e.g., locals and high frequency traders). Therefore, intraday gross margin calculations may result in some clearing members being charged too much margin and others being charged too little margin, which could necessitate significant end-of-day adjustments. Accordingly, the Commission proposes to amend § 39.13(g)(8)(i) to permit a DCO to collect customer initial margin from its clearing members on a gross basis only during its end-of-day settlement cycle. Proposed § 39.13(g)(8)(i) is consistent with market feedback and attempts to provide DCOs with more flexibility in meeting the requirements in light of the operational issues that may arise intraday. Regulation 39.13(g)(8)(ii) provides that a DCO must require its clearing members to collect customer initial margin from their customers, ‘‘for nonhedge positions, at a level that is greater than 100 percent of the [DCO]’s initial margin requirements with respect to each product and swap portfolio.’’ Consistent with interpretative guidance issued by the Division, the Commission is proposing to amend § 39.13(g)(8)(ii) to permit DCOs to establish customer initial margin requirements based on the type of customer account and to apply prudential standards that result in FCMs collecting customer initial margin at levels commensurate with the risk presented by each customer account. The proposed amendments to § 39.13(g)(8)(ii) would give DCOs reasonable discretion in determining the PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 percentage by which customer initial margin requirements must exceed the DCO’s clearing initial margin requirements with respect to particular products or portfolios. This approach acknowledges that the existing standard does not appropriately take into account each DCO’s particular circumstances and the nature of its clearing members and their customers. Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on each clearing member, by house origin and by each customer origin, in order to prevent a clearing member from carrying positions for which the risk exposure exceeds a specified threshold relative to the clearing member’s and/or the DCO’s financial resources. The Commission is proposing to note that such risk limits should also be imposed to address positions that may be difficult to liquidate. As noted above, recent events highlight the importance of imposing risk limits to address positions that may be difficult to liquidate, particularly concentrated positions. The proposed change would help to ensure that a DCO can properly manage its risks in instances where, for example, a position in a particular contract or swap is concentrated with a particular member, such that there is reason to doubt whether, in the event that this member defaults, other members would be willing and able to accept, collectively, the entirety of that position or swap. Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis, review the risk management policies, procedures, and practices of each of its clearing members, which address the risks that such clearing members may pose to the DCO, and to document such reviews. The Commission is proposing to clarify that DCOs should, having conducted such reviews, take appropriate actions to address concerns identified in such reviews, and require that the documentation of the reviews should include the basis for determining what action was appropriate to take. Absent such follow-up, the reviews would lack purpose. The proposed change would help to ensure that DCOs are taking steps to manage any risks posed by their members, thereby enhancing the DCO’s risk management functions. b. Costs The Commission is proposing to amend § 39.13(g)(2)(i) to clarify that a DCO shall have initial margin requirements that are commensurate with the risks of each product and portfolio, including, but not limited to, concentration of positions. The Commission is merely clarifying that E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules concentrated positions are one of the risks that DCOs should be incorporating in their initial margin requirements. The Commission does not believe that DCOs, or their clearing members, would incur any additional costs with this clarification. In addition, § 39.13(g)(3) requires that a DCO’s systems for generating initial margin requirements, including its theoretical models, be reviewed and validated by a qualified and independent party on a regular basis. The provision further provides that employees of the DCO may conduct the validations as long as they are not responsible for the development or operation of the systems and models being tested. The Commission is proposing to amend § 39.13(g)(3) to specify that ‘‘on a regular basis’’ means annually and to also permit employees of an affiliate of the DCO to conduct such independent validations. The Commission believes these amendments would not impose additional costs on DCOs insofar as DCOs were already interpreting ‘‘regular’’ to mean annual, but rather may reduce costs by permitting the use of employees of a DCO’s affiliate when conducting the independent validations. The Commission is proposing new § 39.13(g)(7)(iii) to specify that, in conducting back tests of initial margin requirements, a DCO shall compare portfolio losses only to those components of initial margin that capture changes in market risk factors. This change is intended to reflect existing practices; therefore, any costs associated with this change would be reduced for DCOs that already follow this approach. Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin on a gross basis for each clearing member’s customer account(s). As noted above, after the regulation was adopted, Division staff learned of operational issues that DCOs would face if the provision applied to intraday settlements as well as end-of-day settlements. As a result, the Commission proposes to amend § 39.13(g)(8)(i) to permit a DCO to collect customer initial margin from its clearing members on a gross basis only during its end-of-day settlement cycle. Because this change is intended to reflect existing practice, any costs associated with this change would be reduced for those DCOs that already follow this approach. Regulation 39.13(g)(8)(i)(B) provides that, for purposes of calculating the gross initial margin requirement for clearing members’ customer accounts, a DCO may require its clearing members to report to the DCO the gross positions VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 of each individual customer or the sum of the gross positions of its customers. The Commission is proposing amendments to § 39.13(g)(8)(i)(B) to require a DCO to have rules requiring its clearing members to report customer information about futures (as well as swaps) to DCOs. This will enable DCOs, in turn, to report this information to the Commission under § 39.19(c)(1)(i)(D), which, as proposed, would require DCOs to report the positions themselves (i.e., the long and short positions) as well as risk sensitivities and valuation data for end-of-day positions. The Commission believes adopting and implementing such rules could impose nominal cost on DCOs. In addition, clearing members may incur costs associated with reporting this data to the extent they are not already doing so. The Commission is proposing to amend § 39.13(g)(12) by requiring DCOs to increase the frequency by which they evaluate the appropriateness of haircuts that they apply to initial margin collateral from a quarterly basis to a monthly basis. Because § 39.11(d)(1) already requires that haircuts be evaluated on a monthly basis for assets that are used to meet the DCO’s financial resources obligations set forth in § 39.11(a), and those resources include initial margin, the Commission does not believe this change will result in any increase in costs. In § 39.13(h)(1)(i), the Commission is proposing to require that, in determining a clearing member’s risk limits under existing § 39.13(h)(1)(i), the factors that a DCO considers must include the difficulty of liquidating the clearing member’s positions. The Commission believes that this change may impose minimal costs. In § 39.13(h)(5)(ii), the Commission is proposing to clarify that a DCO should take appropriate actions to address concerns identified in its review of the risk management policies of its clearing members. The Commission believes that DCOs already do this as part of their compliance with existing § 39.13(h)(5)(ii). In § 39.13(i), the Commission is proposing to require a DCO to provide certain information as part of a rule filing submitted for Commission approval pursuant to § 40.5 to facilitate the Commission’s review of a DCO’s cross-margining program. This information includes: Identification of the products that would be eligible for cross-margining; analysis of the risk characteristics, the liquidity of the respective markets, and availability of reliable prices; financial and operational requirements that would apply to clearing members participating in the PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 22259 program; a description and analysis of the margin methodology that would be used to calculate initial margin requirements; procedures the DCO would follow in the event of a clearing member default; a description of the arrangements for obtaining daily position data with respect to products in the account; whether funds to support the cross-margined positions will be maintained together in one account or in separate accounts at each participating clearing organization; and a copy of the agreement between the clearing organizations participating in the cross-margining program. A DCO may incur costs to prepare and provide this information. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) and (D) of the CEA, the Commission believes that the proposed amendments to § 39.13 will aid in the protection of market participants and the public by enhancing certain risk management requirements of DCOs. For example, proposed § 39.13(g)(12) would require DCOs to increase the frequency by which they evaluate the appropriateness of haircuts that they apply to initial margin collateral. Given that initial margin is held for risk management purposes, assessing haircuts more frequently would enhance a DCO’s ability to manage its risks. In addition, the proposed amendments to § 39.13 will help preserve the efficiency and financial integrity of the derivatives markets by enhancing certain risk management requirements of DCOs. For example, in consideration of section 15(a)(2)(B) of the CEA, the Commission believes the proposed amendments to § 39.13(h)(1)(i), which would specify that a DCO’s risk limits should address positions that may be difficult to liquidate, would help to ensure that a DCO can properly manage its risks in the event of a default, thereby promoting the financial integrity of the derivatives markets. The Commission also believes that the amendments to § 39.13 will strengthen and promote sound risk management practices across DCOs, their clearing members, and clearing members’ customers. Specifically, the amendments enhance, clarify, and provide flexibility in complying with several DCO risk management requirements, which will aid DCOs in efficiently allocating their risk management attention and resources. Finally, in consideration of E:\FR\FM\16MYP2.SGM 16MYP2 22260 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules section 15(a)(2)(E) of the CEA, the Commission notes the public interest in promoting and protecting public confidence in the safety and security of the financial markets. DCOs are essential to risk management in the financial markets, both systemically and on an individual firm level. The proposed amendments, by enhancing, clarifying, and providing flexibility beyond current requirements, promote the ability of DCOs to perform these risk management functions. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. khammond on DSKBBV9HB2PROD with PROPOSALS2 11. Treatment of Funds—§ 39.15 a. Benefits The Commission is proposing to amend § 39.15(b)(1) to clarify that ‘‘funds and assets’’ are equivalent to ‘‘money, securities, and property,’’ which would better align the language of § 39.15(b)(1) with the language in the CEA. Furthermore, § 39.15(b)(2)(ii) requires a DCO to file a petition for an order pursuant to section 4d(a) of the CEA in order for the DCO and its clearing members to commingle customer positions in futures, options, and swaps in a futures customer account subject to section 4d(a) of the CEA The Commission is proposing to amend § 39.15(b)(2)(ii) to permit a DCO to file rules for Commission approval pursuant to § 40.5 in order for the DCO and its clearing members to commingle such positions. This would better align the requirements of § 39.15(b)(2)(ii) with § 39.15(b)(2)(i), which requires a DCO that wants to commingle futures, options, and swaps in a cleared swaps customer account to file rules for Commission approval. This approach would reduce the burden on DCOs while providing the Commission with sufficient means to determine whether the customer funds will be adequately protected. Regulation 39.15(d) requires a DCO to have rules providing for the prompt transfer of all or a portion of a customer’s portfolio of positions and related funds at the same time from the carrying clearing member to another clearing member, without requiring the close-out and re-booking of the positions prior to the requested transfer. Based on feedback received from DCOs, the Commission is proposing to amend § 39.15(d) to delete the words ‘‘at the same time,’’ thus requiring the ‘‘prompt,’’ but not necessarily simultaneous, transfer of a customer’s positions and related funds. The Commission is further amending the VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 provision to require the transfer of related funds ‘‘as necessary,’’ recognizing that the transfer of customer positions will not always require the transfer of funds. These changes are meant to reflect common practice and provide greater flexibility to DCOs in transferring positions and funds. The Commission is also proposing to amend § 39.15(e), which relates to permitted investments of customer funds, to clarify that the regulation applies to any investment of customer funds or assets, including cleared swaps customer collateral, as defined in § 22.1. At the time § 39.15(e) was adopted, the Commission had not yet adopted regulations concerning cleared swaps customer funds but intended for § 39.15(e) to also apply to those funds. This change would ensure that cleared swaps customer collateral receives the same safekeeping as other funds and assets invested by DCOs and would reflect the Commission’s intent. b. Costs The Commission believes proposed amendments to § 39.15(b)(2)(ii) to permit a DCO to file rules for Commission approval pursuant to § 40.5 in order for the DCO and its clearing members to commingle certain customer positions would streamline the procedures for a request to commingle customer funds and would not increase costs to DCOs. As discussed above, the proposal would potentially reduce costs for DCOs that would otherwise have to petition the Commission for an order providing relief from section 4d of the CEA in order to commingle such customer funds. The Commission has not identified any other costs associated with the proposed amendments to § 39.15, including costs to customers in this regard. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) of the CEA, the Commission believes that the proposed amendments to § 39.15 will aid in the protection of market participants and the public, specifically customers of clearing members, by providing clarity on several requirements related to the treatment of customer funds, including with respect to the transfer of customer positions and funds under § 39.15(d). Moreover, the proposed amendments will promote efficiency in the derivatives markets by streamlining the procedures for a request to commingle customer funds, as DCOs would be PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 permitted to file rules for Commission approval whether requesting to commingle customer funds in a futures or cleared swaps customer account. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 12. Default Rules and Procedures— § 39.16 a. Benefits The Commission is proposing to amend § 39.16 to improve DCOs’ default management processes by, among other things: Requiring a DCO to include its clearing members in an annual test of its default management plan in proposed § 39.16(b); requiring the DCO to establish a default committee, which must include clearing members and other participants, that would convene in the event of a default involving substantial or complex positions to help identify any market issues that the DCO is considering in proposed § 39.16(c)(1); and requiring a DCO’s default management procedures to include immediately posting a declaration of a default on the DCO’s website in proposed § 39.16(c)(2)(ii). The proposed amendments are intended to ensure that clearing members are prepared in the event of a default. The Commission is also proposing to amend § 39.16(c)(2)(iii)(C) to require any allocation of a defaulting clearing member’s positions to be proportional to the size of the participating or accepting clearing member’s positions in the same product class at the DCO. This proposed amendment would ensure that clearing members have the flexibility, but not the requirement, to participate in auctions and allocations beyond the proportional size of their respective positions as measured by the initial margin requirement for those positions. This ensures that clearing members cannot be forced to involuntarily absorb positions of a defaulting member which incentivizes the DCO to calibrate its risk management mechanisms in a manner to avoid a scenario in which clearing members’ participation in an auction or allocation falls short of the size of the defaulting clearing member’s positions in that product class. b. Costs To comply with the proposal to require the participation of clearing members in a test of a DCO’s default management plan and in a DCO’s default committee, a DCO may incur costs to coordinate clearing members’ participation and to establish a default committee. However, the Commission E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules believes that many DCOs already involve clearing members in their tests as a matter of best practice. The Commission is not aware of a less costly alternative that would provide clearing members with an opportunity to participate in key aspects of a DCO’s default management. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) of the CEA, the Commission believes that the proposed amendments to § 39.16(c)(2)(ii) to require that a DCO have default procedures that include immediate public notice on the DCO’s website of a declaration of default will aid in the protection of market participants and the public by ensuring more timely notice of a default. In further consideration of section 15(a)(2)(A) of the CEA, the Commission believes the proposed amendments to § 39.16(c)(2)(iii)(C) regarding the allocation of a defaulting clearing member’s positions would protect clearing members from involuntarily having to bid on or accept defaulting positions that are not in proportion to the size of their positions in that product class, while also providing clearing members with the flexibility to voluntarily bid on or accept more than a proportional share of the defaulting positions if that clearing member has the ability to manage the risk of those new positions. In consideration of section 15(a)(2)(B) and (D) of the CEA, the Commission believes the additional amendments to § 39.16(b) and (c)(1) support the financial integrity of the derivatives markets and promote sound risk management practices by requiring DCOs to have greater clearing member participation in their default management processes and procedures. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 13. Rule Enforcement—§ 39.17 khammond on DSKBBV9HB2PROD with PROPOSALS2 a. Benefits Regulation 39.17(a) codifies Core Principle H, which requires a DCO to maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules and dispute resolution. The Commission is proposing a technical change to § 39.17(a)(1) to emphasize that a DCO is required to monitor and enforce compliance by both itself and its VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 members with the DCO’s rules. The Commission is also proposing to amend § 39.17(b), which permits a DCO’s board of directors to delegate its responsibility for compliance with the requirements of § 39.17(a) to the DCO’s risk management committee, to allow a DCO to delegate such responsibility to a committee other than the risk management committee. This would allow DCOs more discretion in delegating this function to the most appropriate committee. b. Costs The Commission does not believe the proposed amendments to § 39.17(a)(1) or (b) will impose any additional costs on DCOs or their members because the changes are technical in nature. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(D) of the CEA, the Commission believes that the proposed amendments to § 39.17 will promote sound risk management practices by emphasizing the importance of compliance with DCO rules and by providing DCOs with additional flexibility in structuring their governance arrangements. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 14. Reporting—§ 39.19 a. Benefits The Commission is proposing several amendments to § 39.19 to add new requirements, clarify certain existing requirements, and incorporate other proposed amendments to part 39. The proposed amendments to § 39.19 would assist DCOs by codifying the bulk of DCOs’ ongoing reporting requirements in one section of part 39 and providing additional detail with respect to certain requirements. In some cases, the Commission is proposing to adopt additional reporting requirements that would allow the Commission to conduct more effective oversight of DCOs’ compliance with the DCO Core Principles and Commission regulations. As part of the daily reporting requirements, the Commission is proposing to amend § 39.19(c)(1)(i)(A)– (C) to specify that a DCO is required to report margin, cash flow, and position information by individual customer account. The Commission believes the ability to analyze positions at the customer level is a crucial element of an effective risk surveillance program. The PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 22261 ability to identify those customers whose positions create the most risk to a DCO’s clearing members would assist the Commission in determining whether adequate measures are in place to address those risks and whether the Commission needs to take proactive steps to see that those risks are mitigated, thereby enhancing the protections afforded to the markets generally. The Commission is also proposing to amend § 39.19(c)(1)(i)(D) to specify that, with respect to end-of-day position information, DCOs must report the positions themselves (i.e., the long and short positions) as well as risk sensitivities and valuation data for these positions.88 This information will better inform staff of the assumptions incorporated into the position information. The Commission is also proposing to amend § 39.19(c)(1)(i)(D) to have DCOs provide any legal entity identifiers and internally-generated identifiers within each customer origin for each clearing member, which would help identify customers across clearing members and DCOs. The Commission is proposing to add certain event-specific reporting requirements, including: A decrease in liquidity resources in proposed § 39.19(c)(4)(ii); a legal name change in proposed § 39.19(c)(4)(xi); a change in any liquidity funding arrangement in proposed § 39.19(c)(4)(xiii); a change in settlement bank arrangements in proposed § 39.19(c)(4)(xiv); a change in a DCO’s arrangements with its depositories that hold customer funds in proposed § 39.19(c)(4)(xvi); a change in the DCO’s fiscal year end in proposed § 39.19(c)(4)(xx); a change in the DCO’s accounting firm in proposed § 39.19(c)(4)(xxi); major decisions of the DCO’s board in proposed § 39.19(c)(4)(xxii); issues with a DCO’s margin model in proposed § 39.19(c)(4)(xxiv) or settlement bank in proposed § 39.19(c)(4)(xv); and new futures or option products accepted for clearing by the DCO in proposed § 39.19(c)(4)(xxvi). The Commission believes it is important for it to be aware of these changes due to their potential impact on a DCO’s operations. b. Costs The Commission expects a minimal cost burden with respect to the proposed changes to the event-specific reporting requirements under § 39.19(c)(4), in part because the incidents that would trigger such 88 The Commission estimates for PRA purposes that there would be an increase in the burden incurred by DCOs, as discussed in section IX.B.2.d above. E:\FR\FM\16MYP2.SGM 16MYP2 22262 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules reporting do not occur very often. Furthermore, where reporting is required under § 39.19(c)(4), a DCO is required to provide a brief notice with only the pertinent details of the incident. Therefore, the Commission believes any costs imposed by these changes would be nominal. With respect to daily reporting requirements, the Commission understands that most DCOs already report the information that would be required. Because staff guidance regarding the format and manner of this reporting is periodically updated, the Commission understands that there may be costs associated with making technical changes to accommodate these updates. The Commission requests an estimate of any such costs from DCOs that currently report this information. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) and (D) of the CEA, the Commission believes that the proposed amendments to § 39.19 will promote the protection of market participants and the public and contribute to sound risk management practices by providing the Commission with timely information that is critical to its risk surveillance efforts. Also, in consideration of section 15(a)(2)(D) of the CEA, the Commission believes that requiring DCOs to provide notice to the Commission of certain additional events under § 39.19, such as a decrease in liquidity resources, settlement bank issues, and margin model issues, could further incentivize DCOs to avoid those risks, or to mitigate them more effectively if they do occur. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. khammond on DSKBBV9HB2PROD with PROPOSALS2 15. Public Information—§ 39.21 a. Benefits The Commission is proposing to amend the public reporting requirements of § 39.21 to require that DCOs make each of the items of information listed in proposed § 39.21(c) 89 available separately on the 89 Regulation 39.21(c) requires a DCO to disclose publicly and to the Commission information concerning: (1) The terms and conditions of each contract, agreement, and transaction cleared and settled by the DCO; (2) each clearing and other fee that the DCO charges its clearing members; (3) the margin-setting methodology; (4) the size and composition of the financial resource package available in the event of a clearing member default; VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 DCO’s website instead of merely including them in the DCO’s rulebook. This would assist DCOs’ current and prospective clearing members and the general public in locating the relevant information. Furthermore, § 39.21(c)(4) requires a DCO to publicly disclose the size and composition of its financial resource package available in the event of a clearing member default. To address questions concerning how often this information must be updated, the Commission is proposing to amend § 39.21(c)(4) to clarify that it should be updated quarterly, consistent with § 39.11(f)(1)(i)(A), which requires a DCO to report this information to the Commission each fiscal quarter. The proposed change would assist DCOs in complying with this requirement, while ensuring consistent and timely disclosure to the public. b. Costs Because the proposed amendments to § 39.21 merely require a DCO to separately make public information that would otherwise be made public in its rulebook, the Commission anticipates any additional costs to DCOs would be minimal. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A), (B), and (D) of the CEA, the Commission believes that the proposed amendments to § 39.21 would enhance existing protection of market participants and the public; promote the efficiency and financial integrity of the derivatives markets; and aid in sound risk management practices by ensuring that key public information about the DCO’s operations is readily accessible, complete, and current. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 16. Governance Fitness Standards, Conflicts of Interest, and Composition of Governing Boards—§§ 39.24, 39.25, and 39.26 arrangements for SIDCOs and subpart C DCOs, and adopt new §§ 39.24, 39.25, and 39.26, which would incorporate all of the requirements of § 39.32. All DCOs, including SIDCOs and subpart C DCOs, would be subject to the same governance fitness standards, conflict of interest requirements, and board composition requirements, which most DCOs already meet in order to be considered a QCCP. This would give DCOs clear direction on how to comply with Core Principles O, P, and Q,90 the only DCO Core Principles for which the Commission has yet to adopt implementing regulations. Further, consistent with Core Principle Q, proposed § 39.26 would require that a DCO’s governing board or committee includes market participants. Because the Commission has become aware of issues in interpreting this requirement, the Commission proposes to define ‘‘market participant,’’ as well as specify that market participation is required on the DCO’s governing board or governing committee, i.e., the group with the ultimate decision-making authority. This would avoid ambiguity and provide DCOs with greater clarity. b. Costs DCOs may incur costs to comply with the proposed requirements in §§ 39.24, 39.25, and 39.26.91 Some DCOs must already comply with these standards and will not face incremental costs. The language that is proposed to be adopted in §§ 39.24, 39.25, and 39.26 is essentially the same as that which is included in § 39.32. Regulation 39.32 is applicable to SIDCOs and subpart C DCOs and implements guidance from the PFMIs with which a CCP must comply in order to be considered a QCCP. Non-U.S. DCOs that are neither SIDCOs nor subpart C DCOs are generally held to these requirements by their home country regulators for the same reason. The Commission believes these standards are appropriate for all DCOs and incorporate best practices within the clearing industry. a. Benefits The Commission is proposing to remove § 39.32, which sets forth requirements for governance c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. Although the Commission believes that most, if not all, DCOs already comply with these (5) daily settlement prices, volume, and open interest for each contract, agreement, or transaction cleared or settled by the DCO; (6) the DCO’s rules and procedures for defaults in accordance with § 39.16; and (7) any other matter that is relevant to participation in the clearing and settlement activities of the DCO. 90 Core Principles O, P, and Q respectively address governance arrangements, conflicts of interest, and composition of governing boards. 91 The Commission estimates for PRA purposes that there would be an increase in the burden incurred by DCOs, as discussed in section IX.B.2.g above. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules requirements, to the extent they do not, the Commission believes the adoption of §§ 39.24, 39.25, and 39.26 would improve DCO risk management practices by promoting transparency of governance arrangements and making sure that the interests of a DCO’s clearing members and, where relevant, their customers are taken into account. This would further enhance the protection of market participants and the public and the financial integrity of the derivatives markets. 17. Legal Risk—§ 39.27 The Commission is proposing to amend § 39.27(c) to require a DCO that provides clearing services outside the United States to ensure that the memorandum required in Exhibit R of Form DCO remains accurate and up-todate. This would ensure that the DCO remains aware of any potential choice of law issues that may impact the enforceability of the DCO’s rules, procedures, and contracts in all relevant jurisdictions. The Commission believes this requirement would not impose additional costs on DCOs that already maintain compliance with § 39.27(c), as DCOs with prudent risk management practices should continuously assess their rules, procedures, and policies against the laws and regulations of the jurisdictions in which they operate. For the same reason, the Commission does not anticipate that this requirement will have a direct impact on any of the section 15(a) factors. b. Costs The Commission does not anticipate any costs associated with these amendments, as the proposed rules remove requirements that need not apply to fully-collateralized positions. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(B) of the CEA, the Commission believes that the proposal to codify relief that the Commission has granted to DCOs that clear fullycollateralized positions from requirements that do not apply to these positions, may increase operational efficiency for such DCOs. The proposed amendments should not impact the protection of market participants and the public, the financial integrity of markets, or sound risk management practices, as the requirements that the Commission is proposing to exclude for fully-collateralized positions do not further these factors when applied to such positions. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. a. Benefits 19. Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject to the Provisions—§§ 39.33, 39.36, 39.37, and Subpart C Election Form As discussed above, fullycollateralized positions do not expose DCOs to many of the risks that traditionally margined products do. Full collateralization prevents a DCO from being exposed to credit risk stemming from the inability of a clearing member or customer of a clearing member to meet a margin call or a call for additional capital. This limited exposure and full collateralization of that exposure renders certain provisions of part 39 inapplicable or unnecessary. As a result, the Division has granted relief from certain provisions of part 39 to DCOs that clear fully-collateralized positions. The Commission is proposing to codify this relief in order to provide greater clarity to DCOs and future applicants for DCO registration regarding how the regulations in part 39 apply to DCOs that clear fullycollateralized positions. DCOs that clear fully-collateralized positions would no longer need to request relief from a. Benefits Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is systemically important in multiple jurisdictions, or that is involved in activities with a more complex risk profile, to maintain financial resources sufficient to enable it to meet its financial obligations to its clearing members notwithstanding a default by the two clearing members creating the largest combined loss in extreme but plausible market conditions. The Commission is proposing to amend § 39.33(a)(1) by replacing the phrase ‘‘largest combined loss’’ with ‘‘largest combined financial exposure’’ in order to be consistent with Core Principle B and § 39.11(a)(1) regarding DCO financial resources requirements. The Commission is also proposing to amend § 39.33(c)(1) to clarify that the ‘‘largest aggregate liquidity obligation’’ means the total amount of cash, in each relevant currency, that the defaulted 18. Fully-Collateralized Positions— §§ 39.2, 39.11, 39.12, 39.13, and 39.19 khammond on DSKBBV9HB2PROD with PROPOSALS2 certain part 39 requirements nor attempt to comply with those requirements, thereby conserving such DCOs’ time and resources. VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 22263 clearing member would be required to pay to the DCO. Proposed § 39.33(c)(1) would reduce currency risk for SIDCOs and subpart C DCOs by ensuring that these DCOs have sufficient liquidity in the relevant currency of corresponding obligations during the time it would take to liquidate or auction a defaulted clearing member’s positions. The Commission is also proposing to amend § 39.33(d) to require that a SIDCO use available Federal Reserve Bank accounts and services where practical. This requirement would further enhance a SIDCO’s financial integrity and management of liquidity risk, thereby promoting the financial integrity of the derivatives markets, while permitting SIDCOs to consider lower cost alternatives where appropriate. Furthermore, the Commission is proposing to amend § 39.36(b)(2)(ii) to replace the words ‘‘produce accurate results’’ with ‘‘react appropriately’’ to better reflect that the purpose of a sensitivity analysis is to assess whether the margin model will react appropriately to changes of inputs, parameters, and assumptions, thereby enhancing the overall margin coverage. The Commission is also proposing to amend § 39.36(d), which requires each SIDCO and subpart C DCO to ‘‘regularly’’ conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears, to clarify that the assessment should be conducted on at least an annual basis or more frequently if there are material relevant market developments. This would ensure that SIDCOs and subpart C DCOs continue to test their margin model with sufficient frequency. Under § 39.37, a SIDCO or a subpart C DCO is required to publicly disclose its responses to the CPMI–IOSCO Disclosure Framework 92 and, in order to ensure the continued accuracy and usefulness of its responses, to review and update them at least every two years and following material changes to the SIDCO’s or subpart C DCO’s system or environment in which it operates. The Commission is proposing to amend § 39.37(b) to additionally require that a SIDCO or a subpart C DCO notify the Commission no later than ten business days after any updates to its responses to the CPMI–IOSCO Disclosure Framework to reflect material changes to the DCO’s system or environment. The notice would need to identify changes made since the latest version of 92 See CMPI–IOSCO, Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology (Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD396.pdf. E:\FR\FM\16MYP2.SGM 16MYP2 22264 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules the responses. The Commission is also proposing to amend § 39.37(c) to explicitly state that a SIDCO or a subpart C DCO must disclose relevant basic data on transaction volume and values that are consistent with the standards set forth in the CPMI–IOSCO Public Quantitative Disclosure Standards for Central Counterparties. These proposed amendments would be consistent with SIDCOs’ and subpart C DCOs’ existing CPMI–IOSCO obligations. The Commission is proposing to amend the subpart C Election Form to better reflect the requirements in subpart C of part 39 and to more closely align the format of the subpart C Election Form with Form DCO by specifying the information and/or documentation that must be provided by a DCO as part of its petition for subpart C election. Currently, unlike Form DCO, the subpart C Election Form references the corresponding regulations in subpart C but does not specify the type or level of information that must be filed as an exhibit. The proposed amendments are intended to provide greater transparency and clarity as to the type of information required. khammond on DSKBBV9HB2PROD with PROPOSALS2 b. Costs Because most of the proposed changes to subpart C of part 39 are meant to clarify existing requirements, the Commission does not expect that SIDCOs and subpart C DCOs would incur additional costs. Where reporting is required under proposed § 39.37(b), the Commission believes any cost associated with such notice would be nominal for SIDCOs and subpart C DCOs, as they would already be required to periodically update the information publicly. c. Section 15(a) Factors In addition to the discussion above, the Commission has evaluated the costs and benefits in light of the specific considerations identified in section 15(a) of the CEA. In consideration of section 15(a)(2)(A) and (B) of the CEA, respectively, the Commission believes that the proposed amendments would protect market participants and the public, and promote the financial integrity of SIDCOs and the derivatives markets by, for example, clarifying SIDCO financial resources requirements, requiring the use of central bank accounts, where practical, and ensuring that SIDCOs continue to test their margin models with sufficient frequency. Moreover, in consideration of section 15(a)(2)(D) of the CEA, the Commission believes the proposed amendments to § 39.33(c)(1) would VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 promote sound risk management policies by reducing currency risk for SIDCOs and subpart C DCOs by ensuring that these DCOs have sufficient liquidity in the relevant currency of corresponding obligations during the time it would take to liquidate or auction a defaulted clearing member’s positions. The Commission has considered the other section 15(a) factors and believes that they are not implicated by the proposed amendments. 20. Part 140—Organization, Functions, and Procedures of the Commission a. Benefits The Commission is proposing to amend § 140.94 to provide the Director of the Division with delegated authority to review DCO registration applications, determine whether an application is materially complete, request additional information in support of an application, stay the running of the 180day review period for an application, and request additional information in support of a rule submission. The Commission believes that DCOs would benefit from the proposed delegation of authority, as it would promote a more efficient process to address these aspects of registration and rule certification. b. Costs The Commission has not identified any costs on DCOs or their members associated with the proposed amendments to § 140.94. c. Section 15(a) Factors The Commission has considered the section 15(a) factors and believes that they are not implicated by this proposed amendment. D. Antitrust Considerations Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the CEA, in issuing any order or adopting any Commission rule or regulation.93 The Commission believes that the public interest to be protected by the antitrust laws is generally the promotion of competition. The Commission requests comment on whether the proposed rulemaking implicates any other specific public interest to be protected by the antitrust laws. The Commission has considered the proposed rulemaking to determine whether it is anticompetitive and has 93 7 PO 00000 U.S.C. 19(b). Frm 00040 Fmt 4701 Sfmt 4702 identified no anticompetitive effects. The Commission requests comment on whether the proposed rulemaking is anticompetitive and, if it is, what the anticompetitive effects are. Because the Commission has determined that the proposed rules are not anticompetitive and have no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA. The Commission requests comment on whether there are less anticompetitive means of achieving the relevant purposes of the CEA that would otherwise be served by adopting the proposed rules. List of Subjects 17 CFR Part 1 Brokers, Commodity futures, Consumer protection, Definitions, Reporting and recordkeeping requirements, Swaps. 17 CFR Part 39 Application form, Business and industry, Commodity futures, Consumer protection, Default rules and procedures, Definitions, Enforcement authority, Participant and product eligibility, Reporting and recordkeeping requirements, Risk management, Settlement procedures, Swaps, Treatment of funds. 17 CFR Part 140 Authority delegations (Government agencies), Conflict of interests, Organization and functions (Government agencies). For the reasons stated in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR chapter I as follows: PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1. The authority citation for part 1 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 24 (2012). 2. In § 1.20, revise paragraphs (d)(1), (7), and (8) introductory text to read as follows: ■ § 1.20 Futures customer funds to be segregated and separately accounted for. * * * * * (d) * * * (1) A futures commission merchant must obtain a written acknowledgment from each bank, trust company, derivatives clearing organization, or E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules futures commission merchant prior to or contemporaneously with the opening of an account by the futures commission merchant with such depositories; provided, however, that a written acknowledgment need not be obtained from a derivatives clearing organization that has adopted and submitted to the Commission rules that provide for the segregation of futures customer funds in accordance with all relevant provisions of the Act and the rules in this chapter, and orders promulgated thereunder, and in such cases, the requirements set forth in paragraphs (d)(3) through (6) of this section shall not apply to the futures commission merchant. * * * * * (7) Where a written acknowledgment is required, the futures commission merchant shall promptly file a copy of the written acknowledgment with the Commission in the format and manner specified by the Commission no later than three business days after the opening of the account or the execution of a new written acknowledgment for an existing account, as applicable. (8) Where a written acknowledgment is required, a futures commission merchant shall obtain a new written acknowledgment within 120 days of any changes in the following: * * * * * ■ 3. In § 1.59, revise paragraph (a)(1) to read as follows: § 1.59 Activities of self-regulatory organization employees, governing board members, committee members, and consultants. (a) * * * (1) Self-regulatory organization means a ‘‘self-regulatory organization,’’ as defined in § 1.3. * * * * * ■ 4. In § 1.63, revise paragraph (a)(1) to read as follows: khammond on DSKBBV9HB2PROD with PROPOSALS2 § 1.63 Service on self-regulatory organization governing boards or committees by persons with disciplinary histories. (a) * * * (1) Self-regulatory organization means a ‘‘self-regulatory organization,’’ as defined in § 1.3, except as defined in paragraph (b)(6) of this section. * * * * * ■ 5. In § 1.64, revise paragraph (a)(1) to read as follows: § 1.64 Composition of various selfregulatory organization governing boards and major disciplinary committees. (a) * * * (1) Self-regulatory organization means ‘‘self-regulatory organization,’’ as defined in § 1.3. * * * * * VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 6. In § 1.69, revise paragraph (a)(7) to read as follows: ■ § 1.69 Voting by interested members of self-regulatory organization governing boards and various committees. (a) * * * (7) Self-regulatory organization means a ‘‘self-regulatory organization,’’ as defined in § 1.3, but excludes registered futures associations for the purposes of paragraph (b)(2) of this section. * * * * * PART 39—DERIVATIVES CLEARING ORGANIZATIONS 7. The authority citation for part 39 continues to read as follows: ■ Authority: 7 U.S.C. 2, 7a–1, and 12a; 12 U.S.C. 5464; 15 U.S.C. 8325. ■ 8. Revise § 39.2 to read as follows: § 39.2 Definitions. For the purposes of this part: Activity with a more complex risk profile includes: (1) Clearing credit default swaps, credit default futures, or derivatives that reference either credit default swaps or credit default futures and (2) Any other activity designated as such by the Commission pursuant to § 39.33(a)(3). Back test means a test that compares a derivatives clearing organization’s initial margin requirements with historical price changes to determine the extent of actual margin coverage. Business day means the intraday period of time starting at the business hour of 8:15 a.m. and ending at the business hour of 4:45 p.m., on all days except Saturdays, Sundays, Federal holidays established under 5 U.S.C. 6103, and foreign holidays. For purposes of this provision, a foreign holiday is a day on which a derivatives clearing organization and its domestic financial markets are closed for a holiday that is not a Federal holiday in the United States. Customer account or customer origin means ‘‘customer account’’ as defined in § 1.3 of this chapter. Depository institution has the meaning set forth in section 19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)). Enterprise risk management means an enterprise-wide strategic business process intended to identify potential events that may affect the enterprise and to manage the probability or impact of those events on the enterprise as a whole, such that the overall risk remains within the enterprise’s risk appetite and provides reasonable assurance that the derivatives clearing PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 22265 organization can continue to achieve its objectives. Fully-collateralized position means a contract cleared by a derivatives clearing organization that requires the derivatives clearing organization to hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible loss that a counterparty could incur upon liquidation or expiration of the contract. House account or house origin means a clearing member account which is not subject to section 4d(a) or 4d(f) of the Act. Key personnel means derivatives clearing organization personnel who play a significant role in the operations of the derivatives clearing organization, the provision of clearing and settlement services, risk management, or oversight of compliance with the Act and Commission regulations in this chapter, and orders promulgated thereunder. Key personnel include, but are not limited to, those persons who are or perform the functions of any of the following: Chief executive officer; president; chief compliance officer; chief operating officer; chief risk officer; chief financial officer; chief technology officer; chief information security officer; and emergency contacts or persons who are responsible for business continuity or disaster recovery planning or program execution. Stress test means a test that compares the impact of potential extreme price moves, changes in option volatility, and/or changes in other inputs that affect the value of a position, to the financial resources of a derivatives clearing organization, clearing member, or large trader, to determine the adequacy of the financial resources of such entities. Subpart C derivatives clearing organization means any derivatives clearing organization, as defined in section 1a(15) of the Act and § 1.3 of this chapter, which: (1) Is registered as a derivatives clearing organization under section 5b of the Act; (2) Is not a systemically important derivatives clearing organization; and (3) Has become subject to the provisions of subpart C of this part, pursuant to § 39.31. Systemically important derivatives clearing organization means a financial market utility that is a derivatives clearing organization registered under section 5b of the Act, which is currently designated by the Financial Stability Oversight Council to be systemically important and for which the Commission acts as the Supervisory Agency pursuant to 12 U.S.C. 5462(8). E:\FR\FM\16MYP2.SGM 16MYP2 22266 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules Trust company means a trust company that is a member of the Federal Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C. 221), but that does not meet the definition of depository institution as set out in this section. U.S. branch or agency of a foreign banking organization means the U.S. branch or agency of a foreign banking organization as defined in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101). ■ 9. Revise § 39.3 to read as follows: khammond on DSKBBV9HB2PROD with PROPOSALS2 § 39.3 Procedures for registration. (a) Application for registration—(1) General procedure. An entity seeking to register as a derivatives clearing organization shall file an application for registration with the Secretary of the Commission in the format and manner specified by the Commission. The Commission will review the application for registration as a derivatives clearing organization pursuant to the 180-day timeframe and procedures specified in section 6(a) of the Act, and may approve or deny the application. If the Commission approves the application, the Commission will register the applicant as a derivatives clearing organization subject to conditions as appropriate. (2) Application. Any entity seeking to register as a derivatives clearing organization shall submit to the Commission a completed Form DCO, which shall include a cover sheet, all applicable exhibits, and any supplemental materials, as provided in appendix A to this part (application). The Commission will not commence processing an application unless the applicant has filed the application as required by this section. Failure to file a completed application will preclude the Commission from determining that an application is materially complete, as provided in section 6(a) of the Act. Upon its own initiative, an applicant may file with its completed application additional information that may be necessary or helpful to the Commission in processing the application. (3) Submission of supplemental information. The filing of a completed application is a minimum requirement and does not create a presumption that the application is materially complete or that supplemental information will not be required. At any time during the application review process, the Commission may request that the applicant provide supplemental information in order for the Commission to process the application. The applicant shall provide supplemental VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 information in the format and manner specified by the Commission. (4) Application amendments. An applicant shall promptly amend its application if it discovers a material omission or error, or if there is a material change in the information provided to the Commission in the application or other information provided in connection with the application. An applicant is only required to submit exhibits and other information that are relevant to the application amendment when filing a Form DCO for the purpose of amending its pending application. (5) Public information. The following sections of all applications to become a registered derivatives clearing organization will be public: First page of the Form DCO cover sheet (up to and including the General Information section), Exhibit A–1 (regulatory compliance chart), Exhibit A–2 (proposed rulebook), Exhibit A–3 (narrative summary of proposed clearing activities), Exhibit A–7 (documents setting forth the applicant’s corporate organizational structure), Exhibit A–8 (documents establishing the applicant’s legal status and certificate(s) of good standing or its equivalent), and any other part of the application not covered by a request for confidential treatment, subject to § 145.9 of this chapter. (6) Extension of time for review. The Commission may further extend the review period in paragraph (a)(1) of this section for any period of time to which the applicant agrees in writing. (b) Stay of application review—(1) By the Commission. The Commission may stay the running of the 180-day review period if an application is materially incomplete, in accordance with section 6(a) of the Act. (2) Delegation of authority. (i) The Commission hereby delegates, until it orders otherwise, to the Director of the Division of Clearing and Risk or the Director’s designee, with the concurrence of the General Counsel or the General Counsel’s designee, the authority to notify an applicant seeking registration as a derivatives clearing organization that the application is materially incomplete and the running of the 180-day period under section 6(a) of the Act is stayed. (ii) The Director of the Division of Clearing and Risk may submit to the Commission for its consideration any matter which has been delegated in this paragraph (b)(2). (iii) Nothing in this paragraph (b)(2) prohibits the Commission, at its election, from exercising the authority delegated in paragraph (b)(2)(i) of this section. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 (c) Withdrawal of application for registration. An applicant for registration may withdraw its application submitted pursuant to paragraph (a) of this section by filing such a request with the Secretary of the Commission in the format and manner specified by the Commission. Withdrawal of an application for registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the application for registration was pending with the Commission. (d) Amendment of an order of registration. (1) A derivatives clearing organization requesting an amendment to an order of registration shall file the request with the Secretary of the Commission in the form and manner specified by the Commission. (2) A derivatives clearing organization shall provide to the Commission, upon the Commission’s request, any additional information and documentation necessary to review a request to amend an order of registration. (3) The Commission shall issue an amended order of registration upon a Commission determination, in its own discretion, that the derivatives clearing organization would maintain compliance with the Act and the Commission’s regulations in this chapter upon amendment to the order. If deemed appropriate, the Commission may issue an amended order of registration subject to conditions. (4) The Commission may decline to issue an amended order based upon a Commission determination, in its own discretion, that the derivatives clearing organization would not continue to maintain compliance with the Act and the Commission’s regulations in this chapter upon amendment to the order. (e) Reinstatement of dormant registration. Before accepting products for clearing, a dormant derivatives clearing organization as defined in § 40.1 of this chapter must reinstate its registration under the procedures of paragraph (a) of this section; provided, however, that an application for reinstatement may rely upon previously submitted materials that still pertain to, and accurately describe, current conditions. (f) Vacation of registration—(1) Request. A registered derivatives clearing organization may have its registration vacated pursuant to section 7 of the Act by submitting a request to the Secretary of the Commission in the format and manner specified by the Commission. A vacation of registration shall not affect any action taken or to be E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules taken by the Commission based upon actions, activities or events occurring during the time that the derivatives clearing organization was registered with the Commission. The request shall include: (i) The date that the vacation should take effect, which must be at least ninety days after the request was submitted; (ii) A description of how the derivatives clearing organization intends to transfer or otherwise unwind all open positions at the derivatives clearing organization and how such actions reflect the interests of affected clearing members and their customers; (iii) A statement that the derivatives clearing organization will continue to maintain its books and records for the requisite statutory and regulatory retention periods after its registration has been vacated; and (iv) A statement that the derivatives clearing organization will continue to make its books and records available for inspection by any representative of the Commission or the United States Department of Justice after its registration has been vacated, as required by § 1.31 of this chapter. (2) Notice to registered entities. The Commission shall fulfill its obligation to send a copy of the request and the order of vacation to all other registered entities by posting the documents on the Commission website. (g) Request for transfer of open interest—(1) Submission. A derivatives clearing organization seeking to transfer its positions comprising open interest for clearing and settlement to another derivatives clearing organization shall submit rules for Commission approval pursuant to § 40.5 of this chapter. (2) Required information. The rule submission shall include, at a minimum, the following: (i) The underlying agreement that governs the transfer; (ii) A description of the transfer, including the reason for the transfer and the impact of the transfer on the rights and obligations of clearing members and market participants holding the positions that comprise the derivatives clearing organization’s open interest; (iii) A discussion of the transferee’s ability to comply with the Act, including the core principles applicable to derivatives clearing organizations, and the Commission’s regulations in this chapter; (iv) The transferee’s rules marked to show changes that would result from acceptance of the transferred positions; (v) A list of products for which the derivatives clearing organization requests transfer of open interest; and VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (vi) A representation by the transferee that it is in and will maintain compliance with the Act, including the core principles applicable to derivatives clearing organizations, and the Commission’s regulations in this chapter upon the transfer of the open interest. (3) Commission action. The Commission may request additional information in support of a rule submission filed under paragraph (g)(1) of this section, and may grant approval of the rules in accordance with § 40.5 of this chapter. ■ 10. In § 39.4, revise paragraphs (a) and (e) to read as follows: § 39.4 Procedures for implementing derivatives clearing organization rules and clearing new products. (a) Request for approval of rules. A registered derivatives clearing organization may request, pursuant to the procedures of § 40.5 of this chapter, that the Commission approve any or all of its rules and subsequent amendments thereto, including operational rules, prior to their implementation or, notwithstanding the provisions of section 5c(c)(2) of the Act, at any time thereafter, under the procedures of § 40.5 of this chapter. A derivatives clearing organization may label as ‘‘approved by the Commission’’ only those rules that have been so approved. * * * * * (e) Holding securities in a futures portfolio margining account. A derivatives clearing organization seeking to provide a portfolio margining program under which securities would be held in a futures account as defined in § 1.3 of this chapter, shall submit rules to implement such portfolio margining program for Commission approval in accordance with § 40.5 of this chapter. Concurrent with the submission of such rules for Commission approval, the derivatives clearing organization shall petition the Commission for an order under section 4d(a) of the Act. ■ 11. In § 39.10, revise paragraphs (c)(1), (3) and (4) and add paragraph (d) to read as follows: § 39.10 Compliance with core principles. * * * * * (c) * * * (1) Designation. Each derivatives clearing organization shall establish the position of chief compliance officer, designate an individual to serve as the chief compliance officer, and provide the chief compliance officer with full responsibility and authority to develop and enforce, in consultation with the board of directors or the senior officer, PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 22267 appropriate compliance policies and procedures, to fulfill the duties set forth in the Act and Commission regulations in this chapter. (i) The individual designated to serve as chief compliance officer shall have the background and skills appropriate for fulfilling the responsibilities of the position. No individual who would be disqualified from registration under sections 8a(2) or 8a(3) of the Act may serve as the chief compliance officer. (ii) The chief compliance officer shall report to the board of directors or the senior officer of the derivatives clearing organization or, if the derivatives clearing organization engages in substantial activities not related to clearing, the senior officer responsible for the derivatives clearing organization’s clearing activities. The board of directors or the senior officer shall approve the compensation of the chief compliance officer. (iii) The chief compliance officer shall meet with the board of directors or the senior officer at least once a year. (iv) A change in the designation of the individual serving as the chief compliance officer of the derivatives clearing organization shall be reported to the Commission in accordance with the requirements of § 39.19(c)(4)(x). * * * * * (3) Annual report. The chief compliance officer shall, not less than annually, prepare and sign a written report that covers the most recently completed fiscal year of the derivatives clearing organization. The annual report shall, at a minimum: (i) Contain a description of the derivatives clearing organization’s written policies and procedures, including the code of ethics and conflict of interest policies; provided that, to the extent that the derivatives clearing organization’s written policies and procedures have not materially changed since they were most recently described in an annual report to the Commission, and if the annual report containing the most recent description was submitted within the last five years, the annual report may instead incorporate by reference the relevant descriptions from the most recent annual report containing the description; (ii) Review each core principle and applicable Commission regulation in this chapter including, in the case of systemically important derivatives clearing organizations and subpart C derivatives clearing organizations, regulations in subpart C of this part, and with respect to each: (A) Identify, by name, rule number, or other identifier, the compliance policies E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22268 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules and procedures that are designed to ensure compliance with each core principle and applicable regulation in this chapter; (B) Provide an assessment as to the effectiveness of these policies and procedures; (C) Discuss areas for improvement, and recommend potential or prospective changes or improvements to the derivatives clearing organization’s compliance program and resources allocated to compliance; (iii) List any material changes to compliance policies and procedures since the last annual report; (iv) Describe the financial, managerial, and operational resources set aside for compliance with the Act and Commission regulations in this chapter; and (v) Describe any material compliance matters, including incidents of noncompliance, since the date of the last annual report, and describe the corresponding action taken. (4) Submission of annual report to the Commission. (i) Prior to submitting the annual report to the Commission, the chief compliance officer shall provide the annual report to the board of directors or the senior officer of the derivatives clearing organization or, if the derivatives clearing organization engages in substantial activities not related to clearing, the senior officer responsible for the derivatives clearing organization’s clearing activities, for review. Submission of the report to the board of directors or the senior officer shall be recorded in the board minutes or otherwise, as evidence of compliance with the requirement in this paragraph (c)(4)(i). The annual report shall describe the process by which it was submitted to the board of directors or the senior officer, including the date of submission. (ii) The annual report shall be submitted to the Secretary of the Commission in the format and manner specified by the Commission not more than 90 days after the end of the derivatives clearing organization’s fiscal year. The report shall include a certification by the chief compliance officer that, to the best of his or her knowledge and reasonable belief, and under penalty of law, the annual report is accurate and complete. (iii) The derivatives clearing organization shall promptly submit an amended annual report if material errors or omissions in the report are identified after submission. An amendment must contain the certification required under paragraph(c)(4)(ii) of this section. (iv) A derivatives clearing organization may request from the VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Commission an extension of time to submit its annual report in accordance with § 39.19(c)(3). * * * * * (d) Enterprise risk management—(1) General. A derivatives clearing organization shall have an enterprise risk management program that identifies and assesses sources of risk and their potential impact on the operations and services of the derivatives clearing organization. The derivatives clearing organization shall measure, monitor, and manage identified sources of risk on an ongoing basis, including through the development and use of appropriate information systems. The derivatives clearing organization shall test the effectiveness of any mitigating controls employed to reduce identified sources of risk to ensure that the risks are properly mitigated. (2) Enterprise risk management framework. A derivatives clearing organization shall establish and maintain written policies and procedures, approved by its board of directors or a committee of the board of directors that establish an appropriate enterprise risk management framework. The framework shall be reviewed at least annually by the board of directors or committee of the board of directors and updated as necessary. (3) Standards for enterprise risk management framework. A derivatives clearing organization shall follow generally accepted standards and industry best practices in the development and review of its enterprise risk management framework, assessment of the performance of its enterprise risk management program, and management and mitigation of risk to the derivatives clearing organization. (4) Enterprise risk officer. A derivatives clearing organization shall identify as its enterprise risk officer an appropriate individual that exercises the full responsibility and authority to manage the enterprise risk management program of the derivatives clearing organization. The enterprise risk officer shall have the authority, independence, resources, expertise, and access to relevant information necessary to fulfil the responsibilities of the position consistent with the requirements of this section. ■ 12. Revise § 39.11 to read as follows: § 39.11 Financial resources. (a) General. A derivatives clearing organization shall have adequate financial, operational, and managerial resources, as determined by the Commission, to discharge each responsibility of the derivatives clearing organization. A derivatives clearing PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 organization shall maintain sufficient financial resources to cover its exposures with a high degree of confidence. At a minimum, each derivatives clearing organization shall possess financial resources that exceed the total amount that would: (1) Enable the derivatives clearing organization to meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the derivatives clearing organization in extreme but plausible market conditions; Provided that if a clearing member controls another clearing member or is under common control with another clearing member, the affiliated clearing members shall be deemed to be a single clearing member for purposes of the provision in this paragraph (a)(1); and (2) Enable the derivatives clearing organization to cover its operating costs for a period of at least one year, calculated on a rolling basis. A derivatives clearing organization shall identify and adequately manage its general business risks and hold sufficient liquid resources to cover potential business losses that are not related to clearing members’ defaults, so that the derivatives clearing organization can continue to provide services as a going concern. (b) Types of financial resources. (1) Financial resources available to satisfy the requirements of paragraph (a)(1) of this section may include: (i) The derivatives clearing organization’s own capital; (ii) Guaranty fund deposits; (iii) Default insurance; (iv) Potential assessments for additional guaranty fund contributions, if permitted by the derivatives clearing organization’s rules; and (v) Any other financial resource deemed acceptable by the Commission. (2) Financial resources available to satisfy the requirements of paragraph (a)(2) of this section shall include: (i) The derivatives clearing organization’s own capital; and (ii) Any other financial resource deemed acceptable to the Commission. (3) A financial resource may be allocated, in whole or in part, to satisfy the requirements of either paragraph (a)(1) or (2) of this section, but not both paragraphs, and only to the extent the use of such financial resource is not otherwise limited by the Act, Commission regulations in this chapter, the derivatives clearing organization’s rules, or any other contractual arrangements to which the derivatives clearing organization is a party. E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules (c) Calculation of financial resources requirements. (1) A derivatives clearing organization shall, on a monthly basis, perform stress tests that will allow it to make a reasonable calculation of the financial resources needed to meet the requirements of paragraph (a)(1) of this section. The derivatives clearing organization shall have reasonable discretion in determining the methodology used to calculate the requirements, subject to the limitations identified in paragraph (c)(2) of this section, and provided that the methodology must take into account both historical data and hypothetical scenarios. The Commission may review the methodology and require changes as appropriate. The requirements of this paragraph (c) do not apply to fullycollateralized positions. (2) When calculating its largest financial exposure, a derivatives clearing organization: (i) In netting its exposure against the clearing member’s initial margin, shall: (A) Use that portion of the margin amount on deposit that is required; and (B) Use customer initial margin only to the extent permitted by parts 1 and 22 of this chapter, as applicable; (ii) Shall combine the customer and house stress test losses of each clearing member using the same stress test scenarios; (iii) May net any gains in the house account with losses in the customer account, if permitted by the derivatives clearing organization’s rules, but shall not net losses in the house account with gains in the customer account; and (iv) With respect to a clearing member’s cleared swaps customer account, may net gains for one customer against losses for another customer only to the extent permitted by the derivatives clearing organization’s rules. (3) A derivatives clearing organization shall, on a monthly basis, make a reasonable calculation of its projected operating costs over a 12-month period in order to determine the amount needed to meet the requirements of paragraph (a)(2) of this section. The derivatives clearing organization shall have reasonable discretion in determining the methodology used to compute such projected operating costs. The Commission may review the methodology and require changes as appropriate. (d) Valuation of financial resources. (1) At appropriate intervals, but not less than monthly, a derivatives clearing organization shall compute the current market value of each financial resource used to meet its obligations under paragraph (a) of this section. Reductions in value to reflect credit, market, and VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 liquidity risks (haircuts) shall be applied as appropriate and evaluated on a monthly basis. (2) If assessments for additional guaranty fund contributions are permitted by the derivatives clearing organization’s rules, in calculating the financial resources available to meet its obligations under paragraph (a)(1) of this section: (i) The derivatives clearing organization shall have rules requiring that its clearing members have the ability to meet an assessment within the time frame of a normal end-of-day variation settlement cycle; (ii) The derivatives clearing organization shall monitor the financial and operational capacity of its clearing members to meet potential assessments; (iii) The derivatives clearing organization shall apply a 30 percent haircut to the value of potential assessments; and (iv) The derivatives clearing organization shall only count the value of assessments, after the haircut, to meet up to 20 percent of the total amount required under paragraph (a)(1) of this section. (e) Liquidity of financial resources. (1)(i) The derivatives clearing organization shall effectively measure, monitor, and manage its liquidity risks, maintaining sufficient liquid resources such that it can, at a minimum, fulfill its cash obligations when due. The derivatives clearing organization shall hold assets in a manner where the risk of loss or of delay in its access to them is minimized. (ii) The financial resources allocated by the derivatives clearing organization to meet the requirements of paragraph (a)(1) of this section shall be sufficiently liquid to enable the derivatives clearing organization to fulfill its obligations as a central counterparty during a one-day settlement cycle. The derivatives clearing organization shall maintain cash, U.S. Treasury obligations, or high quality, liquid, general obligations of a sovereign nation, in an amount greater than or equal to an amount calculated as follows: (A) Calculate the average daily settlement variation pay for each clearing member over the last fiscal quarter; (B) Calculate the sum of those average daily settlement variation pays; and (C) Using that sum, calculate the average of its clearing members’ average daily settlement variation pays. (iii) If the total amount of the financial resources required pursuant to the calculation set forth in paragraph (e)(1)(ii) of this section is insufficient to enable the derivatives clearing PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 22269 organization to fulfill its obligations during a one-day settlement cycle, the derivatives clearing organization may take into account a committed line of credit or similar facility for the purpose of meeting the remainder of the requirement of this paragraph (e) (subject to the limitation in paragraph (e)(3) of this section). (iv) A derivatives clearing organization is not subject to paragraph (e)(1)(ii) of this section for fullycollateralized positions. (2) The financial resources allocated by the derivatives clearing organization to meet the requirements of paragraph (a)(2) of this section must include unencumbered, liquid financial assets (i.e., cash and/or highly liquid securities) sufficient to enable the derivatives clearing organization to cover its operating costs for a period of at least six months. If the financial resources allocated to meet the requirements of paragraph (a)(2) of this section do not include such assets in a sufficient amount, the derivatives clearing organization may take into account a committed line of credit or similar facility for the purpose of meeting the requirements of this paragraph (subject to the limitation in paragraph (e)(3) of this section). (3) A committed line of credit or similar facility may be allocated, in whole or in part, to satisfy the requirements of either paragraph (e)(1)(ii) or (e)(2) of this section, but not both paragraphs. (4)(i) Assets in a guaranty fund shall have minimal credit, market, and liquidity risks and shall be readily accessible on a same-day basis; (ii) Cash balances shall be invested or placed in safekeeping in a manner that bears little or no principal risk; and (iii) Letters of credit shall not be a permissible asset for a guaranty fund. (f) Reporting requirements—(1) Quarterly reporting. Each fiscal quarter, or at any time upon Commission request, a derivatives clearing organization shall: (i) Report to the Commission: (A) The amount of financial resources necessary to meet the requirements of paragraph (a) of this section and §§ 39.33(a) and 39.39(d), if applicable; (B) The value of each financial resource available, computed in accordance with the requirements of paragraph (d) of this section; and (C) The manner in which the derivatives clearing organization meets the liquidity requirements of paragraph (e) of this section. (ii) Provide the Commission with a financial statement, including the balance sheet, income statement, and E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22270 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules statement of cash flows, prepared in accordance with U.S. generally accepted accounting principles, of the derivatives clearing organization; provided, however, that for a derivatives clearing organization that is incorporated or organized under the laws of any foreign country, the financial statement may be prepared in accordance with either U.S. generally accepted accounting principles or the International Financial Reporting Standards issued by the International Accounting Standards Board. The balance sheet must identify any assets allocated to satisfy the requirements of paragraph (a)(1) or (2) of this section as held for that purpose; and (iii) Report to the Commission the value of each individual clearing member’s guaranty fund deposit, if the derivatives clearing organization reports having guaranty fund deposits as a financial resource available to satisfy the requirements of paragraph (a)(1) of this section and §§ 39.33(a) and 39.39(d), if applicable. (iv) The calculations required by this paragraph (f) shall be made as of the last business day of the derivatives clearing organization’s fiscal quarter. The report shall be submitted not later than 17 business days after the end of the derivatives clearing organization’s fiscal quarter, or at such later time as the Commission may permit, in its discretion, upon request by the derivatives clearing organization. (2) Annual reporting. (i) A derivatives clearing organization shall submit to the Commission an audited year-end financial statement of the derivatives clearing organization calculated in accordance with U.S. generally accepted accounting principles; provided, however, that for a derivatives clearing organization that is incorporated or organized under the laws of any foreign country, the financial statement may be prepared in accordance with either U.S. generally accepted accounting principles or the International Financial Reporting Standards issued by the International Accounting Standards Board. The balance sheet must identify any assets allocated to satisfy the requirements of paragraph (a)(1) or (2) of this section as held for that purpose. (ii) The report required by paragraph (f)(2)(i) of this section shall be submitted not later than 90 days after the end of the derivatives clearing organization’s fiscal year, or at such later time as the Commission may permit, in its discretion, upon request by the derivatives clearing organization. (iii) A derivatives clearing organization shall submit concurrently with the audited year-end financial VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 statement required by paragraph (f)(2)(i) of this section: (A) A reconciliation, including appropriate explanations, of its balance sheet in the audited year-end financial statement with the balance sheet in the derivatives clearing organization’s financial statement for the last quarter of the fiscal year when material differences exist or, if no material differences exist, a statement so indicating; and (B) Such further information as may be necessary to make the statements not misleading. (3) Other reporting. (i) A derivatives clearing organization shall provide to the Commission as part of its first report under paragraph (f)(1) of this section, and in the event of any change thereafter: (A) Sufficient documentation explaining the methodology used to compute its financial resources requirements under paragraph (a) of this section and §§ 39.33(a) and 39.39(d), if applicable; and (B) Sufficient documentation explaining the basis for its determinations regarding the valuation and liquidity requirements set forth in paragraphs (d) and (e) of this section. (ii) A derivatives clearing organization shall provide to the Commission copies of any agreements establishing or amending a credit facility, insurance coverage, or other arrangement evidencing or otherwise supporting the derivatives clearing organization’s conclusions regarding its: (A) Financial resources available to satisfy the requirements of paragraph (a) of this section and §§ 39.33(a) and 39.39(d), if applicable; and (B) Liquidity resources available to satisfy the requirements of paragraph (e) of this section and § 39.33(c), if applicable. (4) Certification. A derivatives clearing organization shall provide with each report submitted pursuant to this section a certification by the person responsible for the accuracy and completeness of the report that, to the best of his or her knowledge and reasonable belief, and under penalty of law, the information contained in the report is accurate and complete. ■ 13. In § 39.12, revise paragraphs (a) introductory text, (a)(1) introductory text, (a)(1)(i), (a)(4), (5) and (6), (b)(1) introductory text, and (b)(2) to read as follows: § 39.12 Participant and product eligibility. (a) Participant eligibility. A derivatives clearing organization shall have appropriate admission and continuing participation requirements for clearing members of the derivatives PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 clearing organization that are objective, publicly disclosed, and risk-based. (1) Fair and open access for participation. The participation requirements shall permit fair and open access. (i) A derivatives clearing organization shall not have restrictive clearing member standards if less restrictive requirements that achieve the same objective and that would not materially increase risk to the derivatives clearing organization or clearing members could be adopted; * * * * * (4) Monitoring. A derivatives clearing organization shall have procedures to verify, on an ongoing basis, the compliance of each clearing member with each participation requirement of the derivatives clearing organization. (5) Reporting. (i) A derivatives clearing organization shall require all clearing members, including nonfutures commission merchants, to provide to the derivatives clearing organization periodic financial reports that contain any financial information that the derivatives clearing organization determines is necessary to assess whether participation requirements are being met on an ongoing basis. (ii) A derivatives clearing organization shall require clearing members that are futures commission merchants to provide the financial reports that are specified in § 1.10 of this chapter to the derivatives clearing organization. (iii) A derivatives clearing organization shall require clearing members that are not futures commission merchants to make the periodic financial reports provided pursuant to paragraph (a)(5)(i) of this section available to the Commission upon the Commission’s request or, in lieu of imposing the requirement in this paragraph (a)(5)(iii), a derivatives clearing organization may provide such financial reports directly to the Commission upon the Commission’s request. (iv) A derivatives clearing organization shall have rules that require clearing members to provide to the derivatives clearing organization, in a timely manner, information that concerns any financial or business developments that may materially affect the clearing members’ ability to continue to comply with participation requirements under this section. (v) The requirements in paragraphs (a)(5)(i) and (iii) of this section shall not apply with respect to non-futures commission merchant clearing members of a derivatives clearing organization E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules that only clear fully-collateralized positions. (6) Enforcement. A derivatives clearing organization shall have the ability to enforce compliance with its participation requirements and shall have procedures for the suspension and orderly removal of clearing members that no longer meet the requirements. (b) * * * (1) A derivatives clearing organization shall have appropriate requirements for determining the eligibility of agreements, contracts, or transactions submitted to the derivatives clearing organization for clearing, taking into account the derivatives clearing organization’s ability to manage the risks associated with such agreements, contracts, or transactions. Factors to be considered in determining product eligibility include, but are not limited to: * * * * * (2) A derivatives clearing organization that clears swaps shall have rules providing that all swaps with the same terms and conditions, as defined by product specifications established under derivatives clearing organization rules, submitted to the derivatives clearing organization for clearing are economically equivalent within the derivatives clearing organization and may be offset with each other within the derivatives clearing organization. * * * * * ■ 14. In § 39.13, revise paragraphs (b), (f), (g)(2)(i), (g)(3), (g)(4)(i) introductory text, (g)(7), (8) and (12), (h)(1)(i) introductory text, and (h)(3) and (5) and add paragraph (i) to read as follows: § 39.13 Risk management. khammond on DSKBBV9HB2PROD with PROPOSALS2 * * * * * (b) Risk management framework. A derivatives clearing organization shall have and implement written policies, procedures, and controls, approved by its board of directors, that establish an appropriate risk management framework that, at a minimum, clearly identifies and documents the range of risks to which the derivatives clearing organization is exposed, addresses the monitoring and management of the entirety of those risks, and provides a mechanism for internal audit. The risk management framework shall be regularly reviewed and updated as necessary. * * * * * (f) Limitation of exposure to potential losses from defaults. A derivatives clearing organization, through margin requirements and other risk control mechanisms, shall limit its exposure to potential losses from defaults by its VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 clearing members to minimize the risk that: (1) The operations of the derivatives clearing organization would be disrupted; and (2) Non-defaulting clearing members would be exposed to losses that nondefaulting clearing members cannot anticipate or control. (g) * * * (2) * * * (i) A derivatives clearing organization shall have initial margin requirements that are commensurate with the risks of each product and portfolio, including any unusual characteristics of, or risks associated with, particular products or portfolios, including but not limited to jump-to-default risk or similar jump risk, and concentration of positions. * * * * * (3) Independent validation. A derivatives clearing organization shall have its systems for generating initial margin requirements, including its theoretical models, reviewed and validated by a qualified and independent party on an annual basis. Such qualified and independent parties may be independent contractors or employees of the derivatives clearing organization, or of an affiliate of the derivatives clearing organization, but shall not be persons responsible for development or operation of the systems and models being tested. (4) * * * (i) A derivatives clearing organization may allow reductions in initial margin requirements for related positions if the price risks with respect to such positions are significantly and reliably correlated. The price risks of different positions will only be considered to be reliably correlated if there is a conceptual basis for the correlation in addition to an exhibited statistical correlation. That conceptual basis may include, but is not limited to, the following: * * * * * (7) Back tests. A derivatives clearing organization shall conduct back tests, as defined in § 39.2, using an appropriate time period but not less than the previous 30 days, as follows: (i) On a daily basis, a derivatives clearing organization shall conduct back tests with respect to products or swap portfolios that are experiencing significant market volatility, to test the adequacy of its initial margin requirements, as follows: (A) For that product if the derivatives clearing organization uses a productbased margin methodology; (B) For each spread involving that product if there is a defined spread margin rate; PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 22271 (C) For each account held by a clearing member at the derivatives clearing organization that contains a significant position in that product, by house origin and by each customer origin; and (D) For each such swap portfolio, including any portfolio containing futures and/or options and held in a commingled account pursuant to § 39.15(b)(2), by beneficial owner. (ii) On at least a monthly basis, a derivatives clearing organization shall conduct back tests to test the adequacy of its initial margin requirements, as follows: (A) For each product for which the derivatives clearing organization uses a product-based margin methodology; (B) For each spread for which there is a defined spread margin rate; (C) For each account held by a clearing member at the derivatives clearing organization, by house origin and by each customer origin; and (D) For each swap portfolio, including any portfolio containing futures and/or options and held in a commingled account pursuant to § 39.15(b)(2), by beneficial owner. (iii) In conducting back tests of initial margin requirements, a derivatives clearing organization shall compare portfolio losses only to those components of initial margin that capture changes in market risk factors. (8) Customer margin—(i) Gross margin. (A) During the end-of-day settlement cycle, a derivatives clearing organization shall collect initial margin on a gross basis for each clearing member’s customer account(s) equal to the sum of the initial margin amounts that would be required by the derivatives clearing organization for each individual customer within that account if each individual customer were a clearing member. (B) For purposes of calculating the gross initial margin requirement for each clearing member’s customer account(s), a derivatives clearing organization shall have rules that require its clearing members to provide to the derivatives clearing organization reports each day setting forth end-of-day gross positions of each beneficial owner within each customer origin of the clearing member. (C) A derivatives clearing organization may not, and may not permit its clearing members to, net positions of different customers against one another. (D) A derivatives clearing organization may collect initial margin for its clearing members’ house accounts on a net basis. (ii) Customer initial margin requirements. A derivatives clearing E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22272 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules organization shall require its clearing members to collect customer initial margin at a level that is not less than 100 percent of the derivatives clearing organization’s clearing initial margin requirements with respect to each product and portfolio and commensurate with the risk presented by each customer account. The derivatives clearing organization shall have reasonable discretion in determining whether and by how much such customer initial margin requirements must exceed the derivatives clearing organization’s clearing initial margin requirements with respect to particular products or portfolios. The Commission may review such customer initial margin levels and require different levels if the Commission deems the levels insufficient to protect the financial integrity of the derivatives clearing organization or its clearing members. (iii) Withdrawal of customer initial margin. A derivatives clearing organization shall require its clearing members to ensure that their customers do not withdraw funds from their accounts with such clearing members unless the net liquidating value plus the margin deposits remaining in a customer’s account after such withdrawal are sufficient to meet the customer initial margin requirements with respect to all products and swap portfolios held in such customer’s account which are cleared by the derivatives clearing organization. * * * * * (12) Haircuts. A derivatives clearing organization shall apply appropriate reductions in value to reflect credit, market, and liquidity risks (haircuts), to the assets that it accepts in satisfaction of initial margin obligations, taking into consideration stressed market conditions, and shall evaluate the appropriateness of the haircuts on at least a monthly basis. * * * * * (h) * * * (1) * * * (i) A derivatives clearing organization shall impose risk limits on each clearing member, by house origin and by each customer origin, in order to prevent a clearing member from carrying positions for which the risk exposure exceeds a specified threshold relative to the clearing member’s and/or the derivatives clearing organization’s financial resources, and to address positions that may be difficult to liquidate. The derivatives clearing organization shall have reasonable discretion in determining: * * * * * VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (3) Stress tests. A derivatives clearing organization shall conduct stress tests, as defined in § 39.2, as follows: (i) On a daily basis, a derivatives clearing organization shall conduct stress tests with respect to each large trader who poses significant risk to a clearing member or the derivatives clearing organization, including futures, options, and swaps cleared by the derivatives clearing organization, which are held by all clearing members carrying accounts for each such large trader. The derivatives clearing organization shall have reasonable discretion in determining which traders to test and the methodology used to conduct such stress tests. The Commission may review the selection of accounts and the methodology and require changes, as appropriate. (ii) On at least a weekly basis, a derivatives clearing organization shall conduct stress tests with respect to each clearing member account, by house origin and by each customer origin, and each swap portfolio, including any portfolio containing futures and/or options and held in a commingled account pursuant to § 39.15(b)(2), by beneficial owner, under extreme but plausible market conditions. The derivatives clearing organization shall have reasonable discretion in determining the methodology used to conduct such stress tests. The Commission may review the methodology and require changes, as appropriate. (iii) The requirements in paragraphs (h)(3)(i) and (ii) of this section do not apply with respect to clearing member accounts that hold only fullycollateralized positions. * * * * * (5) Clearing members’ risk management policies and procedures. (i) A derivatives clearing organization shall have rules that: (A) Require its clearing members to maintain current written risk management policies and procedures, which address the risks that such clearing members may pose to the derivatives clearing organization; (B) Ensure that it has the authority to request and obtain information and documents from its clearing members regarding their risk management policies, procedures, and practices, including, but not limited to, information and documents relating to the liquidity of their financial resources and their settlement procedures; and (C) Require its clearing members to make information and documents regarding their risk management policies, procedures, and practices PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 available to the Commission upon the Commission’s request. (ii) A derivatives clearing organization shall review the risk management policies, procedures, and practices of each of its clearing members, which address the risks that such clearing members may pose to the derivatives clearing organization, on a periodic basis, take appropriate action to address concerns identified in such reviews, and document such reviews and the basis for determining what action was appropriate to take. * * * * * (i) Cross-margining. (1) A derivatives clearing organization that seeks to implement a cross-margining program with one or more clearing organizations shall file rules for Commission approval pursuant to § 40.5 of this chapter that contain, at a minimum, the following information: (i) Identification of the products that would be eligible for cross-margining, including product specifications or criteria that would be used to define eligible products; (ii) Analysis of the risk characteristics of the eligible products; (iii) Analysis of the liquidity of the respective markets for the eligible products, including the ability of clearing members and the derivatives clearing organization to offset or mitigate the risk of such products in a timely manner and proposed means for addressing insufficient liquidity; (iv) Analysis of the availability of reliable prices for each of the eligible products; (v) Financial and operational requirements that would apply to clearing members participating in the program; (vi) A description and analysis of the margin methodology that would be used to calculate initial margin requirements, including: (A) Any margin reduction applied to correlated positions; and (B) Information regarding the correlations between eligible products, including the stability of the relationship among the eligible products and the potential impact a change in the correlations could have on setting initial margin requirements; (vii) Procedures the derivatives clearing organization would follow in the event of a clearing member default, including any loss-sharing arrangements; (viii) A description of the arrangements for obtaining daily position data with respect to products in the account; (ix) Whether funds to support the cross-margined positions will be E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules maintained together in one account or in separate accounts at each participating clearing organization; and (x) A copy of the agreement between the clearing organizations participating in the cross-margining program. (2) The Commission may request additional information in support of a rule submission filed under this paragraph (i), and may approve such rules in accordance with § 40.5 of this chapter. ■ 15. Revise § 39.15 to read as follows: khammond on DSKBBV9HB2PROD with PROPOSALS2 § 39.15 Treatment of funds. (a) Required standards and procedures. A derivatives clearing organization shall establish standards and procedures that are designed to protect and ensure the safety of funds and assets belonging to clearing members and their customers. (b) Customer funds—(1) Segregation. A derivatives clearing organization shall comply with the applicable segregation requirements of section 4d of the Act and Commission regulations in this part, or any other applicable Commission regulation in this chapter or order requiring that customer funds and assets, including money, securities, and property, be segregated, set aside, or held in a separate account. (2) Commingling—(i) Cleared swaps account. In order for a derivatives clearing organization and its clearing members to commingle customer positions in futures, options, foreign futures, foreign options, and swaps, or any combination thereof, and any money, securities, or property received to margin, guarantee or secure such positions, in an account subject to the requirements of section 4d(f) of the Act, the derivatives clearing organization shall file rules for Commission approval pursuant to § 40.5 of this chapter. Such rule submission shall include, at a minimum, the following: (A) Identification of the products that would be commingled, including product specifications or the criteria that would be used to define eligible products; (B) Analysis of the risk characteristics of the eligible products; (C) Identification of whether the swaps would be executed bilaterally and/or executed on a designated contract market and/or a swap execution facility; (D) Analysis of the liquidity of the respective markets for the eligible products, the ability of clearing members and the derivatives clearing organization to offset or mitigate the risk of such eligible products in a timely manner, without compromising the financial integrity of the account, and, VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 as appropriate, proposed means for addressing insufficient liquidity; (E) Analysis of availability of reliable prices for each of the eligible products; (F) A description of the financial, operational, and managerial standards or requirements for clearing members that would be permitted to commingle eligible products; (G) A description of the systems and procedures that would be used by the derivatives clearing organization to oversee such clearing members’ risk management of any such commingled positions; (H) A description of the financial resources of the derivatives clearing organization, including the composition and availability of a guaranty fund with respect to the eligible products that would be commingled; (I) A description and analysis of the margin methodology that would be applied to the commingled eligible products, including any margin reduction applied to correlated positions, and any applicable margin rules with respect to both clearing members and customers; (J) An analysis of the ability of the derivatives clearing organization to manage a potential default with respect to any of the eligible products that would be commingled; (K) A discussion of the procedures that the derivatives clearing organization would follow if a clearing member defaulted, and the procedures that a clearing member would follow if a customer defaulted, with respect to any of the commingled eligible products in the account; and (L) A description of the arrangements for obtaining daily position data with respect to eligible products in the account. (ii) Futures account. In order for a derivatives clearing organization and its clearing members to commingle customer positions in futures, options, foreign futures, foreign options, and swaps, or any combination thereof, and any money, securities, or property received to margin, guarantee or secure such positions, in an account subject to the requirements of section 4d(a) of the Act, the derivatives clearing organization shall file rules for Commission approval pursuant to § 40.5 of this chapter. Such rule submission shall include, at a minimum, the information required under paragraph (b)(2)(i) of this section. (iii) Commission action. The Commission may request additional information in support of a rule submission filed under paragraph (b)(2)(i) or (ii) of this section, and may PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 22273 approve such rules in accordance with § 40.5 of this chapter. (c) Holding of funds and assets. A derivatives clearing organization shall hold funds and assets belonging to clearing members and their customers in a manner which minimizes the risk of loss or of delay in the access by the derivatives clearing organization to such funds and assets. (d) Transfer of customer positions. A derivatives clearing organization shall have rules providing that the derivatives clearing organization will promptly transfer all or a portion of a customer’s portfolio of positions, and related funds as necessary, from the carrying clearing member of the derivatives clearing organization to another clearing member of the derivatives clearing organization, without requiring the close-out and rebooking of the positions prior to the requested transfer, subject to the following conditions: (1) The customer has instructed the carrying clearing member to make the transfer; (2) The customer is not currently in default to the carrying clearing member; (3) The transferred positions will have appropriate margin at the receiving clearing member; (4) Any remaining positions will have appropriate margin at the carrying clearing member; and (5) The receiving clearing member has consented to the transfer. (e) Permitted investments. Funds and assets belonging to clearing members and their customers that are invested by a derivatives clearing organization shall be held in instruments with minimal credit, market, and liquidity risks. Any investment of customer funds or assets, including cleared swaps customer collateral, as defined in § 22.1 of this chapter, by a derivatives clearing organization shall comply with § 1.25 of this chapter. ■ 16. Revise § 39.16 to read as follows: § 39.16 Default rules and procedures. (a) General. A derivatives clearing organization shall have rules and procedures designed to allow for the efficient, fair, and safe management of events during which clearing members become insolvent or default on the obligations of such clearing members to the derivatives clearing organization. (b) Default management plan. A derivatives clearing organization shall maintain a current written default management plan that delineates the roles and responsibilities of its board of directors, its risk management committee, any other committee that a derivatives clearing organization may have that has responsibilities for default E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22274 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules management, and the derivatives clearing organization’s management, in addressing a default, including any necessary coordination with, or notification of, other entities and regulators. Such plan shall address any differences in procedures with respect to highly liquid products and less liquid products. A derivatives clearing organization shall conduct and document a test of its default management plan at least on an annual basis. The derivatives clearing organization shall include clearing members in a test of its default management plan at least on an annual basis. (c) Default procedures. (1) A derivatives clearing organization shall have procedures that would permit the derivatives clearing organization to take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a default on the obligations of a clearing member to the derivatives clearing organization. The derivatives clearing organization shall have a default committee that would be convened in the event of a default involving substantial or complex positions to help identify market issues with any action the derivatives clearing organization is considering. The default committee shall include clearing members and may include other participants to help the derivatives clearing organization efficiently manage the house or customer positions of the defaulting clearing member. (2) A derivatives clearing organization shall have rules that set forth its default procedures, including: (i) The derivatives clearing organization’s definition of a default; (ii) The actions that the derivatives clearing organization may take upon a default, which shall include immediate public notice of a declaration of default on its website and the prompt transfer, liquidation, or hedging of the customer or house positions of the defaulting clearing member, as applicable, and which may include, in the discretion of the derivatives clearing organization, the auctioning or allocation of such positions to other clearing members; (iii) Any obligations that the derivatives clearing organization imposes on its clearing members to participate in auctions, or to accept allocations, of the customer or house positions of the defaulting clearing member, provided that: (A) The derivatives clearing organization shall permit a clearing member to outsource to a qualified third party, authority to act in the clearing member’s place in any auction, subject VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 to appropriate safeguards imposed by the derivatives clearing organization; (B) The derivatives clearing organization shall permit a clearing member to outsource to a qualified third party, authority to act in the clearing member’s place in any allocations, subject to appropriate safeguards imposed by the derivatives clearing organization; and (C) The derivatives clearing organization shall not require a clearing member to bid for a portion of, or accept an allocation of, the defaulting clearing member’s positions that is not proportional to the size of the bidding or accepting clearing member’s positions in the same product class at the derivatives clearing organization, as measured by the clearing initial margin requirement for those positions; (iv) The sequence in which the funds and assets of the defaulting clearing member and its customers and the financial resources maintained by the derivatives clearing organization would be applied in the event of a default; (v) A provision that the funds and assets of a defaulting clearing member’s customers shall not be applied to cover losses with respect to a house default; and (vi) A provision that the excess house funds and assets of a defaulting clearing member shall be applied to cover losses with respect to a customer default, if the relevant customer funds and assets are insufficient to cover the shortfall. (3) A derivatives clearing organization shall make its default rules publicly available as provided in § 39.21. (d) Insolvency of a clearing member. (1) A derivatives clearing organization shall have rules that require a clearing member to provide prompt notice to the derivatives clearing organization if it becomes the subject of a bankruptcy petition, receivership proceeding, or the equivalent; (2) No later than upon receipt of such notice, a derivatives clearing organization shall review the continuing eligibility of the clearing member for clearing membership; and (3) No later than upon receipt of such notice, a derivatives clearing organization shall take any appropriate action, in its discretion, with respect to such clearing member or its house or customer positions, including but not limited to liquidation or transfer of positions, suspension, or revocation of clearing membership. ■ 17. Revise § 39.17 to read as follows: § 39.17 Rule enforcement. (a) General. A derivatives clearing organization shall: PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 (1) Maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance (by itself and its clearing members) with the rules of the derivatives clearing organization and the resolution of disputes; (2) Have the authority and ability to discipline, limit, suspend, or terminate the activities of a clearing member due to a violation by the clearing member of any rule of the derivatives clearing organization; and (3) Report to the Commission regarding rule enforcement activities and sanctions imposed against clearing members as provided in paragraph (a)(2) of this section, in accordance with § 39.19(c)(4)(xvii). (b) Authority to enforce rules. The board of directors of the derivatives clearing organization may delegate responsibility for compliance with the requirements of paragraph (a) of this section to an appropriate committee, unless the responsibilities are otherwise required to be carried out by the chief compliance officer pursuant to the Act or this part. ■ 18. Revise § 39.19 to read as follows: § 39.19 Reporting. (a) General. A derivatives clearing organization shall provide to the Commission the information specified in this section and any other information that the Commission determines to be necessary to conduct oversight of the derivatives clearing organization. (b) Submission of reports—(1) General requirement. A derivatives clearing organization shall submit the information required by this section to the Commission in a format and manner specified by the Commission. (2) Certification. When making a submission pursuant to this section, an employee of the derivatives clearing organization must certify that he or she is duly authorized to make such a submission on behalf of the derivatives clearing organization. (3) Time zones. Unless otherwise specified by the Commission or its designee, any stated time in this section is Central time for information concerning derivatives clearing organizations located in that time zone, and Eastern time for information concerning all other derivatives clearing organizations. (c) Reporting requirements. Each registered derivatives clearing organization shall provide to the Commission or other person as may be required or permitted by this paragraph (c) the information specified as follows: E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules (1) Daily reporting. (i) A derivatives clearing organization shall compile as of the end of each trading day, and submit to the Commission by 10:00 a.m. on the next business day, a report containing the following information related to all positions other than fully-collateralized positions: (A) Initial margin requirements and initial margin on deposit for each clearing member, by house origin and by each customer origin, and by each individual customer account; (B) Daily variation margin, separately listing the mark-to-market amount collected from or paid to each clearing member, by house origin and by each customer origin, and by each individual customer account; (C) All other daily cash flows relating to clearing and settlement including, but not limited to, option premiums and payments related to swaps such as coupon amounts, collected from or paid to each clearing member, by house origin and by each customer origin, and by each individual customer account; and (D) End-of-day positions, including as appropriate the risk sensitivities and valuation data for such positions, for each clearing member, by house origin and by each customer origin, and by each individual customer account. The derivatives clearing organization shall identify each individual customer account using both a legal entity identifier and any internally-generated identifier, where applicable, within each customer origin for each clearing member. (ii) The report shall contain the information required by paragraphs (c)(1)(i)(A) through (D) of this section for: (A) All futures positions, and options positions, as applicable; (B) All swaps positions; and (C) All securities positions that are: (1) Held in a customer account subject to section 4d of the Act; or (2) Subject to a cross-margining agreement. (2) Quarterly reporting. A derivatives clearing organization shall provide to the Commission each fiscal quarter, or at any time upon Commission request, a report of the derivatives clearing organization’s financial resources as required by § 39.11(f)(1). (3) Annual reporting. A derivatives clearing organization shall provide to the Commission each year: (i) The annual report of the chief compliance officer required by § 39.10; and (ii) Audited year-end financial statements of the derivatives clearing organization as required by § 39.11(f)(2). VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (iii) [Reserved] (iv) The reports required by this paragraph (c)(3) shall be filed not later than 90 days after the end of the derivatives clearing organization’s fiscal year, or at such later time as the Commission may permit, in its discretion, upon request by the derivatives clearing organization. (4) Event specific reporting—(i) Decrease in financial resources. If there is a decrease of 25 percent or more in the total value of the financial resources available to satisfy the requirements under § 39.11(a)(1) or § 39.33(a), as applicable, either from the last quarterly report submitted under § 39.11(f) or from the value as of the close of the previous business day, a derivatives clearing organization shall report such decrease to the Commission no later than one business day following the day the 25 percent threshold was reached. The report shall include: (A) The total value of the financial resources as of the close of business the day the 25 percent threshold was reached; (B) If reporting a decrease in value from the previous business day, the total value of the financial resources immediately prior to the 25 percent decline; (C) A breakdown of the value of each financial resource reported in each of paragraphs (c)(4)(i)(A) and (B) of this section, calculated in accordance with the requirements of § 39.11(d) or § 39.33(b), as applicable, including the value of each individual clearing member’s guaranty fund deposit if the derivatives clearing organization reports guaranty fund deposits as a financial resource; and (D) A detailed explanation for the decrease. (ii) Decrease in liquidity resources. If there is a decrease of 25 percent or more in the total value of the liquidity resources available to satisfy the requirements under § 39.11(e) or § 39.33(c), as applicable, either from the last quarterly report submitted under § 39.11(f) or from the value as of the close of the previous business day, a derivatives clearing organization shall report such decrease to the Commission no later than one business day following the day the 25 percent threshold was reached. The report shall include: (A) The total value of the liquidity resources as of the close of business the day the 25 percent threshold was reached; (B) If reporting a decrease in value from the previous business day, the total value of the liquidity resources immediately prior to the 25 percent decline; PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 22275 (C) A breakdown of the value of each liquidity resource reported in each of paragraphs (c)(4)(ii)(A) and (B) of this section, calculated in accordance with the requirements of § 39.11(e) or § 39.33(c), as applicable, including the value of each individual clearing member’s guaranty fund deposit if the derivatives clearing organization reports guaranty fund deposits as a liquidity resource; and (D) A detailed explanation for the decrease. (iii) Decrease in ownership equity. A derivatives clearing organization shall report to the Commission no later than two business days prior to an event which the derivatives clearing organization knows or reasonably should know will cause a decrease of 20 percent or more in ownership equity from the last reported ownership equity balance as reported on a quarterly or audited financial statement required to be submitted by paragraph (c)(2) or (c)(3)(ii), respectively, of this section; but in any event no later than two business days after such decrease in ownership equity for events that caused the decrease about which the derivatives clearing organization did not know and reasonably could not have known prior to the event. The report shall include: (A) Pro forma financial statements reflecting the derivatives clearing organization’s estimated future financial condition following the anticipated decrease for reports submitted prior to the anticipated decrease and current financial statements for reports submitted after such a decrease; and (B) A detailed explanation for the decrease or anticipated decrease in the balance. (iv) Six-month liquid asset requirement. A derivatives clearing organization shall notify the Commission immediately when the derivatives clearing organization knows or reasonably should know of a deficit in the six-month liquid asset requirement of § 39.11(e)(2). (v) Change in current assets. A derivatives clearing organization shall notify the Commission no later than two business days after the derivatives clearing organization’s current liabilities exceed its current assets. The notice shall include a balance sheet that reflects the derivatives clearing organization’s current assets and current liabilities and an explanation as to the reason for the negative balance. (vi) Request to clearing member to reduce its positions. A derivatives clearing organization shall notify the Commission immediately of a request by the derivatives clearing organization E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 22276 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules to one of its clearing members to reduce the clearing member’s positions. The notice shall include: (A) The name of the clearing member; (B) The time the clearing member was contacted; (C) The number of positions for futures and options, and for swaps, the number of outstanding trades and notional amount, by which the derivatives clearing organization requested the reduction; (D) All products that are the subject of the request; and (E) The reason for the request. (vii) Determination to transfer or liquidate positions. A derivatives clearing organization shall notify the Commission immediately of a determination by the derivatives clearing organization that a position it carries for one of its clearing members must be liquidated immediately or transferred immediately, or that the trading of any account of a clearing member shall be only for the purpose of liquidation because that clearing member has failed to meet an initial or variation margin call or has failed to fulfill any other financial obligation to the derivatives clearing organization. The notice shall include: (A) The name of the clearing member; (B) The time the clearing member was contacted; (C) The products that are subject to the determination; (D) The number of positions for futures and options, and for swaps, the number of outstanding trades and notional amount, that are subject to the determination; and (E) The reason for the determination. (viii) Default of a clearing member. A derivatives clearing organization shall notify the Commission immediately of the default of a clearing member. An event of default shall be determined in accordance with the rules of the derivatives clearing organization. The notice of default shall include: (A) The name of the clearing member; (B) The products the clearing member defaulted upon; (C) The number of positions for futures and options, and for swaps, the number of outstanding trades and notional amount, the clearing member defaulted upon; and (D) The amount of the financial obligation. (ix) Change in ownership or corporate or organizational structure—(A) Reporting requirement. A derivatives clearing organization shall report to the Commission any anticipated change in the ownership or corporate or organizational structure of the derivatives clearing organization or its parent(s) that would: VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (1) Result in at least a 10 percent change of ownership of the derivatives clearing organization; (2) Create a new subsidiary or eliminate a current subsidiary of the derivatives clearing organization; or (3) Result in the transfer of all or substantially all of the assets of the derivatives clearing organization to another legal entity. (B) Required information. The report shall include: A chart outlining the new ownership or corporate or organizational structure; a brief description of the purpose and impact of the change; and any relevant agreements effecting the change and corporate documents such as articles of incorporation and bylaws. (C) Time of report. The report shall be submitted to the Commission no later than three months prior to the anticipated change, provided that the derivatives clearing organization may report the anticipated change to the Commission later than three months prior to the anticipated change if the derivatives clearing organization does not know and reasonably could not have known of the anticipated change three months prior to the anticipated change. In such event, the derivatives clearing organization shall immediately report such change to the Commission as soon as it knows of such change. (D) Confirmation of change report. The derivatives clearing organization shall report to the Commission the consummation of the change no later than two business days following the effective date of the change. (x) Change in key personnel. A derivatives clearing organization shall report to the Commission no later than two business days following the departure or addition of persons who are key personnel as defined in § 39.2. The report shall include, as applicable, the name and contact information of the person who will assume the duties of the position permanently or the person who will assume the duties on a temporary basis until a permanent replacement fills the position. (xi) Change in legal name. A derivatives clearing organization shall report to the Commission no later than two business days following a legal name change of the derivatives clearing organization. (xii) Change in credit facility funding arrangement. A derivatives clearing organization shall report to the Commission no later than one business day after the derivatives clearing organization changes a credit facility funding arrangement it has in place, or is notified that such arrangement has changed, including but not limited to a PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 change in lender, change in the size of the facility, change in expiration date, or any other material changes or conditions. (xiii) Change in liquidity funding arrangement. A derivatives clearing organization shall report to the Commission no later than one business day after the derivatives clearing organization changes a liquidity funding arrangement it has in place, or is notified that such arrangement has changed, including but not limited to a change in provider, change in the size of the facility, change in expiration date, or any other material changes or conditions. (xiv) Change in settlement bank arrangements. A derivatives clearing organization shall report to the Commission no later than one business day after any change in the derivatives clearing organization’s arrangements with any settlement bank used by the derivatives clearing organization or approved for use by the derivatives clearing organization’s clearing members. (xv) Settlement bank issues. A derivatives clearing organization shall report to the Commission no later than one business day after any material issues or concerns arise regarding the performance, stability, liquidity, or financial resources of any settlement bank used by the derivatives clearing organization or approved for use by the derivatives clearing organization’s clearing members. (xvi) Change in depositories for customer funds. A derivatives clearing organization shall report to the Commission no later than one business day after any change in the derivatives clearing organization’s arrangements with any depository of customer funds. (xvii) Sanctions against a clearing member. A derivatives clearing organization shall provide notice to the Commission no later than two business days after the derivatives clearing organization imposes sanctions against a clearing member. (xviii) Financial condition and events. A derivatives clearing organization shall provide to the Commission immediate notice after the derivatives clearing organization knows or reasonably should have known of: (A) The institution of any legal proceedings which may have a material adverse financial impact on the derivatives clearing organization; (B) Any event, circumstance or situation that materially impedes the derivatives clearing organization’s ability to comply with this part and is not otherwise required to be reported under this section; or E:\FR\FM\16MYP2.SGM 16MYP2 khammond on DSKBBV9HB2PROD with PROPOSALS2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules (C) A material adverse change in the financial condition of any clearing member that is not otherwise required to be reported under this section. (xix) Financial statements material inadequacies. A derivatives clearing organization shall provide notice to the Commission within 24 hours if the derivatives clearing organization discovers or is notified by an independent public accountant of the existence of any material inadequacy in a financial statement, and within 48 hours after giving such notice provide a written report stating what steps have been and are being taken to correct the material inadequacy. (xx) Change in fiscal year. A derivatives clearing organization shall provide to the Commission immediate notice of any change to the start and end dates of its fiscal year. (xxi) Change in independent accounting firm. A derivatives clearing organization shall report to the Commission no later than one business day after any change in the derivatives clearing organization’s independent public accounting firm. The report shall include the date of such change, the name and contact information of the new firm, and the reason for the change. (xxii) Major decision of the board of directors. A derivatives clearing organization shall report to the Commission any major decision of the derivatives clearing organization’s board of directors as required by § 39.24(a)(3)(i). (xxiii) System safeguards. A derivatives clearing organization shall report to the Commission: (A) Exceptional events as required by § 39.18(g); or (B) Planned changes as required by § 39.18(h). (xxiv) Margin model issues. A derivatives clearing organization shall report to the Commission no later than one business day after any issue occurs with a DCO’s margin model, including margin models for cross-margined portfolios, that affects the DCO’s ability to calculate or collect initial margin or variation margin. (xxv) Recovery and wind-down plans. A derivatives clearing organization that is required to maintain recovery and wind-down plans pursuant to § 39.39(b) shall submit its plans to the Commission no later than the date on which the derivatives clearing organization is required to have the plans. A derivatives clearing organization that is not required to maintain recovery and wind-down plans pursuant to § 39.39(b), but which nonetheless maintains such plans, may choose to submit its plans to the VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Commission. A derivatives clearing organization that has submitted its recovery and wind-down plans to the Commission shall, upon making any revisions to the plans, submit the revised plans to the Commission along with a description of the changes and the reason for those changes. (xxvi) New product accepted for clearing. A derivatives clearing organization shall provide notice to the Commission no later than 30 calendar days prior to accepting a new product for clearing. The notice shall include: (A) A brief description of the new product; (B) The date on which the derivatives clearing organization intends to begin accepting the new product for clearing; (C) A statement as to whether the new product will require the derivatives clearing organization to submit any rule changes pursuant to § 40.5 or § 40.6, and § 40.10, as applicable, of this chapter; (D) A statement as to whether the derivatives clearing organization has informed, or intends to inform, its clearing members and/or the general public of the new product and, if written notice was given, a web address for or copy of such notice; and (E) An explanation of any substantive opposing views received and how the derivatives clearing organization addressed such views or objections. (5) Requested reporting. A derivatives clearing organization shall provide upon request by the Commission and within the time specified in the request: (i) Any information related to its business as a clearing organization, including information relating to trade and clearing details. (ii) A written demonstration, containing supporting data, information and documents, that the derivatives clearing organization is in compliance with one or more core principles and relevant provisions of this part. ■ 19. In § 39.20, revise paragraphs (a) introductory text and (b) to read as follows: § 39.20 Recordkeeping. (a) Requirement to maintain information. A derivatives clearing organization shall maintain records of all activities related to its business as a derivatives clearing organization. Such records shall include, but are not limited to, records of: * * * * * (b) Form and manner of maintaining information—(1) General. The records required to be maintained by this chapter shall be maintained in accordance with the provisions of § 1.31 of this chapter, for a period of not less PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 22277 than 5 years, except as provided in paragraph (b)(2) of this section. (2) Exception for swap data. A derivatives clearing organization that clears swaps must maintain swap data in accordance with the requirements of part 45 of this chapter. ■ 20. Revise § 39.21 to read as follows: § 39.21 Public information. (a) General. A derivatives clearing organization shall provide to market participants sufficient information to enable the market participants to identify and evaluate accurately the risks and costs associated with using the services of the derivatives clearing organization. In furtherance of the objective in this paragraph (a), a derivatives clearing organization shall have clear and comprehensive rules and procedures. (b) Availability of information. A derivatives clearing organization shall make information concerning the rules and the operating and default procedures governing the clearing and settlement systems of the derivatives clearing organization available to market participants. (c) Public disclosure. A derivatives clearing organization shall make the following information readily available to the general public, in a timely manner, by posting such information on the derivatives clearing organization’s website, unless otherwise permitted by the Commission: (1) The terms and conditions of each contract, agreement, and transaction cleared and settled by the derivatives clearing organization; (2) Each clearing and other fee that the derivatives clearing organization charges its clearing members; (3) Information concerning its marginsetting methodology; (4) The size and composition of the financial resource package available in the event of a clearing member default, updated as of the end of the most recent fiscal quarter or upon Commission request and posted concurrently with submission of the report to the Commission under § 39.11(f)(1)(i)(A); (5) Daily settlement prices, volume, and open interest for each contract, agreement, or transaction cleared or settled by the derivatives clearing organization, posted no later than the business day following the day to which the information pertains; (6) The derivatives clearing organization’s rulebook, including rules and procedures for defaults in accordance with § 39.16; (7) A current list of all clearing members; (8) A list of all swaps that the derivatives clearing organization will E:\FR\FM\16MYP2.SGM 16MYP2 22278 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules accept for clearing that identifies which swaps on the list are required to be cleared, in accordance with § 50.3(a) of this chapter; and (9) Any other information that is relevant to participation in the clearing and settlement activities of the derivatives clearing organization. ■ 21. Revise § 39.22 to read as follows: § 39.22 Information sharing. A derivatives clearing organization shall enter into, and abide by the terms of, each appropriate and applicable domestic and international informationsharing agreement, and shall use relevant information obtained from each such agreement in carrying out the risk management program of the derivatives clearing organization. ■ 22. Add § 39.24 to read as follows: khammond on DSKBBV9HB2PROD with PROPOSALS2 § 39.24 Governance. (a) General. (1) A derivatives clearing organization shall have governance arrangements that: (i) Are written; (ii) Are clear and transparent; (iii) Place a high priority on the safety and efficiency of the derivatives clearing organization; and (iv) Explicitly support the stability of the broader financial system and other relevant public interest considerations of clearing members, customers of clearing members, and other relevant stakeholders. (2) The board of directors shall make certain that the derivatives clearing organization’s design, rules, overall strategy, and major decisions appropriately reflect the legitimate interests of clearing members, customers of clearing members, and other relevant stakeholders. (3) To the extent consistent with other statutory and regulatory requirements on confidentiality and disclosure: (i) Major decisions of the board of directors shall be clearly disclosed to clearing members, other relevant stakeholders, and to the Commission; and (ii) Major decisions of the board of directors having a broad market impact shall be clearly disclosed to the public. (b) Governance arrangement requirements. A derivatives clearing organization shall have governance arrangements that: (1) Are clear and documented; (2) To an extent consistent with other statutory and regulatory requirements on confidentiality and disclosure, are disclosed, as appropriate, to the Commission, other relevant authorities, clearing members, customers of clearing members, owners of the derivatives clearing organization, and to the public; VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (3) Describe the structure pursuant to which the board of directors, committees, and management operate; (4) Include clear and direct lines of responsibility and accountability; (5) Clearly specify the roles and responsibilities of the board of directors and its committees, including the establishment of a clear and documented risk management framework; (6) Clearly specify the roles and responsibilities of management; (7) Describe procedures pursuant to which the board of directors oversees the chief risk officer, risk management committee, and material risk decisions; (8) Provide risk management and internal control personnel with sufficient independence, authority, resources, and access to the board of directors so that the operations of the derivatives clearing organization are consistent with the risk management framework established by the board of directors; (9) Assign responsibility and accountability for risk decisions, including in crises and emergencies; and (10) Assign responsibility for implementing the: (i) Default rules and procedures required by §§ 39.16 and 39.35, as applicable; (ii) System safeguard rules and procedures required by §§ 39.18 and 39.34, as applicable; and (iii) Recovery and wind-down plans required by § 39.39, as applicable. (c) Fitness standards. (1) A derivatives clearing organization shall establish and enforce appropriate fitness standards for: (i) Directors; (ii) Members of any disciplinary committee; (iii) Members of the derivatives clearing organization; (iv) Any other individual or entity with direct access to the settlement or clearing activities of the derivatives clearing organization; and (v) Any other party affiliated with any individual or entity described in this paragraph. (2) A derivatives clearing organization shall maintain policies to make certain that: (i) The board of directors consists of suitable individuals having appropriate skills and incentives; (ii) The performance of the board of directors and the performance of individual directors is reviewed on a regular basis; and (iii) Managers have the appropriate experience, skills, and integrity necessary to discharge operational and risk management responsibilities. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 ■ 23. Add § 39.25 to read as follows: § 39.25 Conflicts of interest. A derivatives clearing organization shall: (a) Establish and enforce rules to minimize conflicts of interest in the decision-making process of the derivatives clearing organization; (b) Establish a process for resolving such conflicts of interest; and (c) Describe procedures for identifying, addressing, and managing conflicts of interest involving members of the board of directors. ■ 24. Add § 39.26 to read as follows: § 39.26 Composition of governing boards. A derivatives clearing organization shall ensure that the composition of the governing board or board-level committee of the derivatives clearing organization includes market participants and individuals who are not executives, officers, or employees of the derivatives clearing organization or an affiliate thereof. For purposes of this section, ‘‘market participant’’ means any clearing member of the derivatives clearing organization or customer of a clearing member, or an employee, officer, or director of such an entity. ■ 25. In § 39.27, revise paragraph (c) to read as follows: § 39.27 Legal risk considerations. * * * * * (c) Conflict of laws. If a derivatives clearing organization provides clearing services outside the United States: (1) The derivatives clearing organization shall identify and address any material conflict of law issues. The derivatives clearing organization’s contractual agreements shall specify a choice of law. (2) The derivatives clearing organization shall be able to demonstrate the enforceability of its choice of law in relevant jurisdictions and that its rules, procedures, and contracts are enforceable in all relevant jurisdictions. (3) The derivatives clearing organization shall ensure on an ongoing basis that the memorandum required in paragraph (b) of Exhibit R to appendix A to this part is accurate and up to date and shall submit an updated memorandum to the Commission promptly following all material changes to the analysis or content contained in the memorandum. § 39.32 [Removed and Reserved] 26. Remove and reserve § 39.32. 27. In § 39.33, revise paragraphs (a)(1) and (c)(1)(i), and add paragraph (d)(5) to read as follows: ■ ■ E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules § 39.33 Financial resources requirements for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations. khammond on DSKBBV9HB2PROD with PROPOSALS2 (a) * * * (1) Notwithstanding the requirements of § 39.11(a)(1), each systemically important derivatives clearing organization and subpart C derivatives clearing organization that, in either case, is systemically important in multiple jurisdictions or is involved in activities with a more complex risk profile shall maintain financial resources sufficient to enable it to meet its financial obligations to its clearing members notwithstanding a default by the two clearing members creating the largest combined financial exposure to the derivatives clearing organization in extreme but plausible market conditions. * * * * * (c) * * * (1) * * * (i) Notwithstanding the provisions of § 39.11(e)(1)(ii), each systemically important derivatives clearing organization and subpart C derivatives clearing organization shall maintain eligible liquidity resources, in all relevant currencies, that, at a minimum, will enable it to meet its intraday, sameday, and multiday obligations to perform settlements, as defined in § 39.14(a)(1), with a high degree of confidence under a wide range of stress scenarios that should include, but not be limited to, a default by the clearing member creating the largest aggregate liquidity obligation for the systemically important derivatives clearing organization or subpart C derivatives clearing organization in extreme but plausible market conditions. * * * * * (d) * * * (5) A systemically important derivatives clearing organization with access to accounts and services at a Federal Reserve Bank, pursuant to section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use such accounts and services where practical. * * * * * VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 28. In § 39.36, revise paragraphs (a)(5)(ii), (a)(6), (b)(2)(ii), (d) and (e) to read as follows: ■ § 39.36 Risk management for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations. (a) * * * (5) * * * (ii) Using the results to assess the adequacy of, and to adjust, its total amount of financial resources; and (6) Use the results of stress tests to support compliance with the minimum financial resources requirement set forth in § 39.11(a)(1) or § 39.33(a), as applicable. (b) * * * (2) * * * (ii) Testing of the ability of the models or model components to react appropriately using actual or hypothetical datasets and assessing the impact of different model parameter settings. * * * * * (d) Margin model assessment. Each systemically important derivatives clearing organization and subpart C derivatives clearing organization shall conduct, on at least an annual basis (or more frequently if there are material relevant market developments), an assessment of the theoretical and empirical properties of its margin model for all products it clears. (e) Independent validation. Each systemically important derivatives clearing organization and subpart C derivatives clearing organization shall perform, on an annual basis, a full validation of its financial risk management model and its liquidity risk management model. * * * * * ■ 29. In § 39.37, revise paragraphs (b) and (c) to read as follows: § 39.37 Additional disclosure for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations. * * * * * (b)(1) Review and update its responses disclosed as required by paragraph (a) of this section at least every two years and following material PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 22279 changes to the systemically important derivatives clearing organization’s or subpart C derivatives clearing organization’s system or the environment in which it operates. A material change to the systemically important derivatives clearing organization’s or subpart C derivatives clearing organization’s system or the environment in which it operates is a change that would significantly change the accuracy and usefulness of the existing responses; and (2) Provide notice to the Commission of updates to its responses required by paragraph (b)(1) of this section following material changes no later than ten business days after the updates are made. Such notice shall be accompanied by a copy of the text of the responses that shows all deletions and additions made to the immediately preceding version of the responses; (c) Disclose, publicly and to the Commission, relevant basic data on transaction volume and values consistent with the standards set forth in the Public Quantitative Disclosure Standards for Central Counterparties published by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions; * * * * * ■ 30. In § 39.39, revise paragraph (a)(2) to read as follows: § 39.39 Recovery and wind-down for systemically important derivatives clearing organizations and subpart C derivatives clearing organizations. (a) * * * (2) Wind-down means the actions of a systemically important derivatives clearing organization or subpart C derivatives clearing organization to effect the permanent cessation or sale or transfer of one or more services. * * * * * ■ 31. Revise appendix A to part 39 to read as follows: Appendix A to Part 39—Form DCO Derivatives Clearing Organization Application for Registration BILLING CODE 6351–01–P E:\FR\FM\16MYP2.SGM 16MYP2 22280 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules OMB No. 3038-0076 COMMODITY FUTURES TRADING COMMISSION FORM DCO DERIVATIVES CLEARING ORGANIZATION APPLICATION FOR REGISTRATION GENERAL INSTRUCTIONS Intentional misstatements or omissions of fact may constitute federal criminal violations (7 U.S.C. 13 and 18 U.S.C. 1001) or grounds for disqualification from registration. DEFINITIONS Unless the context requires otherwise, all terms used in this Form DCO have the same meaning as in the Commodity Exchange Act ("Act"), and in the General Rules and Regulations of the Commodity Futures Trading Commission ("Commission") thereunder. All references to Commission regulations are found at 17 CFR Ch. I. For the purposes of this Form DCO, the tenn "Applicant" shall include any applicant for registration as a derivatives clearing organization. VerDate Sep<11>2014 1. This Form DCO, which includes a Cover Sheet and required Exhibits (together, "Form DCO" or "application"), is to be filed with the Commission by all applicants for registration as a derivatives clearing organization, including applicants when amending a pending application, pursuant to Section 5b of the Act and the Commission's regulations thereunder. Upon the filing of an application for registration or an amendment to an application in accordance with the instructions provided herein, the Commission will publish notice of the filing and afford interested persons an opportunity to submit written data, views and comments concerning such application. No application for registration will be effective unless the Commission, by order, grants such registration. 2. Individuals' names, except the executing signature, shall be given in full (Last Name, First Name, Middle Name). 3. With respect to the executing signature, it must be manually signed by a duly authorized representative of the Applicant as follows: If the Fonn DCO is filed by a corporation, it must be signed in the name of the corporation by a principal officer duly authorized; iffiled by a limited liability company, it must be signed in the name of the limited liability company by a manager or member duly authorized to sign on the limited liability company's behalf; if filed by a partnership, it must be signed in the name of the partnership by a general partner duly authorized; if filed by an unincorporated organization or association which is not a partnership, it must be signed in the name of such organization or association by the managing agent, i.e., a duly authorized person who directs or manages or who participates in the directing or managing of its affairs. 4. If this Form DCO is being filed as an application for registration, all applicable items must be answered in full. If any item or Exhibit is inapplicable, this response must be affirmatively indicated by the designation "none," "not applicable," or "N/A," as appropriate. 5. Under section 5b of the Act and the Commission's regulations thereunder, the Commission is authorized to solicit the infonnation required to be supplied by this Fonn DCO from any Applicant seeking registration as a derivatives clearing organization and from any registered derivatives clearing organization. Disclosure by the Applicant of the infonnation specified in this Form DCO is mandatory prior to the start of the processing of an application for registration as a derivatives clearing 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.000</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 GENERAL INSTRUCTIONS Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22281 organization. The information provided in this Form DCO will be used for the principal purpose of detennining whether the Commission should grant or deny registration to an Applicant. The Commission may determine that additional information is required from the Applicant in order to process its application. An Applicant is therefore encouraged to supplement this Form DCO with any additional information that may he significant to its 011eration as a derivatives clearing organization and to the Commission's review of its application. A Form DCO which is not prepared and executed in compliance with applicable requirements and instructions may be returned as not acceptable for filing. Acceptance of this Form DCO, however, shall not constitute a finding that the Form DCO has been filed as required or that the information submitted is true, current or complete. 6. As provided in 17 CFR 39.3(a)(5), except in cases where the Applicant submits a request for confidential treatment with the Secretary of the Commission pursuant to the Freedom of Information Act and 17 CFR 145.9, information supplied in this application will be included routinely in the public files of the Commission and will be available for inspection by any interested person. APPLICATION AMENDMENTS 1. 17 CFR 39.3(a)(4) requires an Applicant to promptly amend its application if it discovers a material omission or error in the application, or if there is a material change in the information contained in the application, including any supplement or amendment thereto. 2. Applicants, when filing this Form DCO for purposes of amending a pending application, must re-file an entire Cover Sheet, amended if necessary and including an executing signature, and attach thereto revised Exhibits or other materials marked to show changes, as applicable. The submission of an amendment to a pending application represents that the remaining items and Exhibits that are not amended remain true, current, and complete as previously filed. WHERE TO FILE VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.001</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 This Form DCO must be filed with the Commission in the format and manner specified by the Commission. 22282 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION FORM DCO DERIVATIVES CLEARING ORGANIZATION APPLICATION FOR REGISTRATION COVER SHEET Exact name of Applicant as specified in charter Address of principal executive offices D D If this is an APPLICATION for registration, complete in full and check here. Iftllis is an AMENDMENT to a pending application, list below all items that are being amended and check here. GENERAL INFORMATION 1. Name under which business is or will be conducted, if different than name specified above (include acronyms, if any): 2. If name of derivatives clearing organization is being amended, state previous derivatives clearing orgmlization nan1e: 3. Additional contact information: Website URL 4. Main Phone Number List of principal office(s) and address(es) where derivatives clearing organization activities are/will be conducted: VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.002</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Address Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22283 BUSINESS ORGANIZATION 5. lf Applicant is a successor to a previously registered derivatives clearing organization, please complete the following: a. Date of succession _ _ _ _ _ _ _ _ _ _ __ b. Full name and address of predecessor registrant Name Street Address City 6. State Country Zip Code Applicant is a: D Corporation D Partnership (specify whether general or limited) D Limited Liability Company D Other form of organization (specify) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 7. Date of formation: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 8. Jurisdiction of organization: List all other jurisdictions in which Applicant is qualified to do business (including non-US jurisdictions): List all other regulatory licenses or registrations of Applicant (or exemptions from any licensing requirement) including with non-US regulators: 9. FEIN or other Tax ID#: _ _ _ _ _ _ __ VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.003</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 10. Fiscal YearEnd: _ _ _ _ _ _ _ _ __ 22284 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules ADDITIONAL CONTACT INFORMATION 11. Provide contact information specifying name, title, phone numbers, mailing address and e-mail address for the following individuals: a. The primary contact for questions and correspondence regarding the application Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address b. The individual responsible for handling questions regarding the Applicant's financial statements Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address c. The individual responsible for serving as the Chief Risk Officer of the Applicant pursuant to § 39.13 of the Commission's regulations Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address d. The individual responsible for serving as the Chief Compliance Officer of the Applicant pursuant to § 39.10 of the Commission's regulations Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address VerDate Sep<11>2014 The individual responsible for serving as the chief legal officer of the Applicant 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.004</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 e. Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22285 Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address 12. Outside Service Providers: Provide contact information specifying name, title, phone numbers, mailing address and e-mail address for any outside service provider retained by the Applicant as follows: a. Certified Public Accountant Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address b. Legal Counsel Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address c. Records Storage or Management Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address d. Business Continuity/Disaster Recovery Office Phone Number Mobile Phone Number Mailing address E-mail Address e. VerDate Sep<11>2014 Professional consultants providing services related to this application 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.005</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Name and Title 22286 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules e. Professional consultants providing seiVices related to this application Name and Title Office Phone Number Mobile Phone Number Mailing address E-mail Address 13. Applicant agrees and consents tl1at the notice of any proceeding before the Commission in connection with this application may be given by sending such notice by certified mail to the person named below at the address given. Print Name and Title Street Address City State Country Zip Code SIGNATURE/REPRESENTATION 14. Applicant has duly caused this application to be signed on its behalf by its duly authorized day of , 20 representative as of the Applicant and the undersigned each represent hereby that, to the best of their knowledge, all information contained herein is tme, current and complete in all material respects. Tt is understood that all required items and Exhibits are considered integral parts of this Form DCO and that the submission of any amendment represents that all unamended items and Exhibits remain tme, current, and complete as previously filed. Name of Applicant By: _______________________________________________________________ Manual Signature of Duly Authorized Person VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.006</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Print Name and Title of Signatory Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22287 COMMODITY FUTURES TRADING COMMISSION FORM DCO DERIVATIVES CLEARING ORGANIZATION APPLICATION FOR REGISTRATION EXHIBIT INSTRUCTIONS 1. The following Exhibits must be filed with the Commission by each Applicant seeking registration as a derivatives clearing organization pursuant to section 5b of the Act and the Commission's regulations thereunder. 2. The application must include a Table of Contents listing each Exhibit required by this Form DCO and indicating which, if any, Exhibits are inapplicable. For any Exhibit that is inapplicable, next to the Exhibit letter specify "none," "not applicable," or "N/A,'' as appropriate. 3. The Exhibils musl be labeled as specified in !his Fonn DCO. Tf any Exhibil requires information that is related to, or may be duplicative of, information required to be included in another Exhibit, Applicant may summarize such information and provide a cross-reference to the Exhibit that contains the required information. 4. If the information required in an Exhibit involves computerized programs or systems, Applicant must submit descriptions of system test procedures, tests conducted, or test results in sufficient detail to demonstrate the Applicant's ability to comply with the core principles specified in section 5b of the Act and the Commission's regulations thereunder (the "Core Principles"). With respect to each system test, Applicant must identify the methodology used and provide the computer software, programs, and data necessary to enable the Col11111ission lo duplicale each syslem lesl as il relales lo !he applicable Core Principle. 5. If Applicant seeks confidential treatment of any Exhibit or a portion of any Exhibit, Applicant VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.007</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 must mark such Exhibit with a prominent stamp, typed legend, or other suitable form of notice on each page or portion of each page stating "Confidential Treatment Requested by [Applicant]." If such marking is impractical under the circumstances, a cover sheet prominently marked "Confidential Treatment Requested by [Applicant]" should be provided for each group of records submitted for which confidential treatment is requested. Each of the records transmitted in this matter shall be individually marked with an identifying number and code so that they are separately identifiable. Applicant must also file a confidentiality request with the Secretary of the Commission in accordance with 17 CFR 145.9. 22288 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules DESCRIPTION OF EXHIBITS VerDate Sep<11>2014 • Attach as Exhibit A-1, a regulatory compliance chart setting forth each Core Principle and providing citations to the Applicant's relevant rules, policies, and procedures that address each Core Principle, and a brief sunnnary of the manner in which Applicant will comply with each Core Principle. • Attach as Exhibit A-2, a copy of Applicant's rulebook. The rulebook must consist of all the rules necessary to carry out Applicant's role as a derivatives clearing organization. Applicant must certify that its rules constitute a binding agreement between Applicant and its clearing members and, in addition to any sepamte clearing member agreements, establish rights and obligations between Applicant and its clearing members. • Attach as Exhibit A-3, a narrative summary of Applicant's proposed clearing activities including (i) the anticipated start date of clearing products (or, if Applicant is already clearing products, the anticipated start date of activities for which Applicant is seeking an amendment to its registration), and (ii) a description of the scope of Applicant's proposed clearing activities (e.g., clearing for a designated contract market; clearing for a swap execution facility; clearing bilaterally executed products). • Attach as Exhibit A-4. a detailed business plan setting forth, at a minimum, the nature of and rationale for Applicant's activities as a derivatives clearing organization, the context in which it is beginning or expanding its activities, and the nature, terms, and conditions of the products it will clear. • Attach as Exhibit A-5, a list of the names of any person (i) who owns 5% or more of Applicant's stock or other ownership or equity interests; or (ii) who, either directly or indirectly, through agreement or otl1erwise, may control or direct the management or policies of Applicant. Provide as part of Exhibit A-5 the full name and address of each such person, indicate the person's ownership percentage, and attach a copy of the agreement or, if there is no agreement, an explanation of the basis upon which such person exercises or may exercise such control or direction. • Attach as Exhibit A-6. a list of Applicant's current officers, directors, governors, general partners, LLC managers, and members of all standing committees, as applicable, or persons performing functions similar to any of the foregoing, indicating for each: 17:42 May 15, 2019 a. Name and Title (with respect to a director, such title must include participation on any commillee of Applicant): b. Dates of commencement and, if appropriate, termination of present term of office or position: c. Length of time each such person has held the same office or position; d. Brief description of the business experience of each person over the last ten years; e. Any other current business affiliations in the financial services industry; f. If such person is not an employee of Applicant, list any compensation paid to the person as a result of his or her position at Applicant. For a director, describe any performance-based compensation; g. A certification for each such person that the individual would not be disqualified under section Sa(2) of the Act or§ 1.63; and h. With respect to a director, indicate whether such director is an independent director, and whether such director is a market participant, and tl1e basis for such a determination as to the director's status. Jkt 247001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.008</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 EXHIBIT A- GENERAL INFORMATION/COMPLIANCE Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22289 If another entity will operate or control the day -to-day business operations of the Applicant, attach for such entity all of the items indicated in Exhibit A-6. • Attach as Exhibit A-7, a diagram of the entire corporate organizational structure of Applicant including the legal name of all entities within the organizational structure and the applicable percentage ownership among affiliated entities. Additionally, provide (i) a list of all jurisdictions in which Applicant or its affiliated entities are doing business; (ii) the registration status of Applicant and its affiliated entities, including pending applications or exemption requests and whether any applications or exemptions have been denied (e.g., country, regulator, registration category, date of registration or request for exemption, date of denial, if applicable); and (iii) the address for legal service of process for Applicant (which cannot be a post office box) for each applicable jurisdiction. • Attach as Exhibit A-8, a copy of the constituent documents, articles of incorporation or association with all amendments thereto, partnership or limited liability agreements, and existing bylaws, operating agreement, or instruments corresponding thereto, of Applicant. Provide a certificate of good standing or its equivalent for Applicant for each jurisdiction in which Applicant is doing business, including any foreign jurisdiction, dated within one month of the date of the Form DCO. • Attach as Exhibit A-9, a brief description of any material pending legal proceeding(s) or governmental investigation(s) to which Applicant or any of its affiliates is a party or is subject, or to which any of its or their property is at issue. Include the name of the court or agency where the proceeding(s) is pending, the date(s) instituted, the principal parties involved, a description of the factual allegations in the complaint(s), the laws that were allegedly violated, and the relief sought. Include similar information as to any such proceeding(s) or any investigation known to be contemplated by any governmental agency. • If Applicant intends to use the services of an outside service provider (including services of its clearing members or market participants), to enable Applicant to comply with any of the Core Principles, Applicant must submit as Exhibit A-1 0 all agreements entered into or to be entered into between Applicant and the outside service provider, and identify (1) the services that will be provided; (2) the staff of the outside service provider who will provide the services (specifying (i) in which department or unit of the outside service provider they are employed, (ii) title, and (iii) if known, level of experlise); and (3) !he Core Principles addressed by such arrangemenl. Each submitted agreement must include all attachments cited therein. If a submitted agreement is not final and executed, the Applicant must submit evidence that constitutes reasonable assurance that such services will be provided as soon as operations require. • Attach as Exhibit A-11, documentation that demonstrates compliance with the Chief Compliance Officer ("CCO") requirements set forth in§ 39.10(c), including but not limited to: a. Evidence of the designation of an individual to serve as Applicant's CCO with full responsibility and authority to develop and enforce appropriate compliance policies and procedures; b. A description of the background and skills of the person designated as the CCO and a certification that the individual would not be disqualified under section 8a(2) or 8a(3) of the Act; VerDate Sep<11>2014 17:42 May 15, 2019 Identification of to whom the ceo reports (i.e., the senior officer of the derivatives clearing organization, the senior officer responsible for the derivative clearing organization's clearing activities, or the Board of Directors of the derivatives clearing organization); d. Any plan of communication or regular or special meetings between the CCO and the Board of Directors or senior officer as appropriate; e. A job description setting forth the CCO's duties; f. Procedures for the remediation of noncompliance issues; and Jkt 247001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.009</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 C. 22290 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules g. • A copy of Applicant's written compliance policies and procedures (including a code of ethics and conflict of interest policy). Attach as Exhibit A-12, a description of Applicant's enterprise risk management program, and how it complies with the requirements set forth in§ 39.10(d). EXHIBIT B- FINANCIAL RESOURCES • Attach as Exhibit B, docmnents that demonstrate compliance with the financial resources requirements set forth in~ 39.11 of the Commission's regulations, including but not limited to: General- Provide as Exhibit B-1: (1) The most recent year-end audited financial statements of Applicant calculated in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), including the balance sheet, income statement, statement of cash flows, notes to the financial statements, and an independent auditor's report issued by a certified public accountant, dated as of the end of Applicant's last fiscal year-end prior to the date of filing the Form DCO. If Applicant docs not have its own year-end audited financial statements, it may submit the audited financial statements of its direct parent company, dated as of the end of the direct parent company's last fiscal year-end prior to the date of filing the Form DCO. Applicant should be aware that once it is registered as a derivatives clearing organization it must submit its own year-end audited financial statements, as required by § 39.ll(f)(2)(i), and the cost of such audit must be included in Applicant's calculation of its total projected operating costs in Exhibit B-3, as described in paragraph c( 5) below; (2) If Applicant is unable to submit a copy of its own audited financial statements or the audited financial statements of its direct parent company, as required by paragraph a(l) above, Applicant must provide its year-end financial statements calculated in accordance with U.S. GAAP, including the balance sheet, income statement, statement of cash flows, and notes to the financial statements, dated as of the end of Applicant's last fiscal year-end prior to the date of filing the Form DCO. These year-end financial statements must be accompanied by an independent accountant's review report issued by a certified public accountant; (3) If the audited or reviewed financial statements submitted in accordance with either paragraph a(l) or paragraph a(2) above are not dated as of the end of Applicant's last fiscal quarter prior to the date of filing the Form DCO. Applicant must also provide a set of Applicant's quarterly unaudited financial statements, dated as of the end of Applicant's last fiscal quarter prior to the date of filing the Fonn DCO; (4) If Applicant is incorporated or organiLed under the laws of any foreign country, it may submit the financial statements described above prepared in accordance with either U.S.GAAP or the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board. Applicant should be aware that once it is registered as a derivatives clearing organization it must submit financial statements prepared in accordance with U.S. GAAP or IFRS, as required by § 39.ll(f)(l) and (f)(2): (5) If Applicant is a start-up or will commence operations after it is registered as a derivatives clearing organization, Applicant must submit a set of pro-forma financial statements, including the balance sheet, income statement, and statement of cash flows, dated as of the first month-end after Applicant's VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.010</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 a. Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22291 expected start date. The set of pro-forma statements must include a narrative description of how the estimates were determined; VerDate Sep<11>2014 17:42 May 15, 2019 A narrative description of how Applicant will fund its financial resources obligations on the first day of its operation as a registered derivatives clearing organization; and (7) Applicant must complete the form that is used by registered derivatives clearing organizations for quarterly reports under § 39.11(f)(l), as of the date of the most recent financial statements provided in Exhibit B-1. If Applicant is a start-up, Applicant must complete the form using estimated figures and must provide a narrative description of how the estimates were determined. The Division of Clearing and Risk will provide the current form to Applicant, upon request. Default Resources- Provide as Exhibit B-2: (1) A calculation of the financial resources needed to enable Applicant to meet its requirements under§ 39.11(a)(1), as of the date of the most recent financial statements provided in Exhibit B-1. Applicant must provide hypothetical default scenarios designed to reflect a variety of market conditions, and the assumptions and variables underlying the scenarios must be explained. All results of the analysis must be included. This calculation requires a start-up enterprise to estimate its largest anticipated financial exposure and explain the basis for such estimate; (2) Evidence of unencumbered assets sufficient to satisfy§ 39.11(a)(1), as of the date of the most recent financial statements provided in Exhibit B-1. For example, this may be demonstrated by audited financial statements or a copy of a bank balance statement(s), custodian statement(s), or statement(s) from any other institution holding such assets for each type of financial resource. A start-up enterprise may not make this demonstration through audited financial statements. If relying on § 39.11 (b)( 1)(v), such other resources must be thoroughly explained. If Applicant intends to use a committed line of credit or similar facility to meet the liquidity requirement pursuant to § 39.11(e)(1)(iii), Applicant must provide a copy of the applicable credit agreement(s). If relying on§ 39.11(b)(1)(i) and/or (v), Applicant cannot also count these assets when demonstrating its compliance with its operating resources requirement under § 39.11(a)(2) and Applicant must detail the amounts or percentages of such assets that apply to each financial resource requirement; (3) A demonstration that Applicant can perform the monthly calculations required by§ 39.11(c)(1); (4) A demonstration that Applicant's financial resources are sufficiently liquid as required by § 39.11(e)(1), as of the date of the most recent financial statements provided in Exhibit B-1; (5) A demonstration of how Applicant will be able to maintain, at all times, the level of resources required by§ 39.11(a)(1); and (6) A demonstration of how default resources financial information will be updated and reported to clearing members and the public under § 39.21, and to the Commission as required by § 39.11 (f)( 1) and § 39.19. Jkt 247001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.011</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 b. (6) Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules khammond on DSKBBV9HB2PROD with PROPOSALS2 c. VerDate Sep<11>2014 17:42 May 15, 2019 Operating Resources- Provide as Exhibit B-3: ( l) A calculation of the financial resources needed to enable Applicant to meet its requirements under § 39.ll(a)(2), as of the date of the most recent financial statements provided in Exhibit B-1; (2) Evidence of assets sufficient to satisfy the amount required under § 39.11 (a)(2), as of the dale of the most recent financial slalemenls provided in Exhibit B-1. For example, this may be demonstrated by audited financial statements or a copy of a bank balance statement(s), custodian statement(s), or statement(s) from any other institution holding such assets, in the name of Applicant, for each type of financial resource. A start-up enterprise may not make this demonstration through audited financial statements. lf relying on § 39.ll(b)(2)(ii), such other resources must be thoroughly explained. lf Applicant intends to use a committed line of credit or similar facility to meet the liquidity requirement pursuant to§ 39.ll(e)(2), Applicant must provide a copy of the applicable credit agreement(s). If relying on§ 39.ll(b)(2)(i) or (ii), Applicant cannot also count these assets when demonstrating its compliance with meeting its default resources requirement under § 39.ll(a)(l) and Applicant must detail the amounts or percentages of such assets that apply to each financial resource requirement (3) A narrative statement demonstrating the adequacy of Applicant's physical infrastructure to carry out business operations, which includes a principal executive office (separate from any personal dwelling) with a street address (not merely a post office box number). For its principal executive office and other facilities Applicant plans to occupy in carrying out its functions as a derivatives clearing organization, a description of the space (e.g., location and square footage), use of the space (e.g., executive office, data center), and the basis for Applicant's right to occupy the space (e.g., lease, agreement with parent company to share leased space); (4) A narrative statement demonstrating the adequacy of the technological systems necessary to carry out Applicant's business operations, including a description of Applicant's information technology and telecommunications systems and a timetable for full operability; (5) A calculation pursuant to § 39.ll(c)(2), including the total projected operating costs for Applicant's first year of operation as a derivatives clearing organization, calculated on a monthly basis with an explanation of the basis for calculating each cost and a discussion of the type, nature, and number of the various costs included; (6) A demonstration that Applicant's financial resources are sufficiently liquid and unencumbered, as required by § 39.ll(c)(2), as of the date of the most recent financial statements provided in Exhibit B-1; (7) A demonstration of how Applicant will maintain, at all times, the level of resources required by § 39.ll(a)(2) with an explanation of asset valuation methodology and calculation of projected revenue, if applicable; and (8) A demonstration of how financial information for operating resources will be updated and reported to clearing members and the public under§ 39.21, and to the Commission as required by § 39.ll(f)(l) and§ 39.19. Jkt 247001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.012</GPH> 22292 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules d. 22293 Human Resources- Provide as Exhibit B-4: (l) An organizational chart showing Applicant's current and planned staff by position and title, including key personnel (as such term is defined in§ 39.2) and, if applicable, managerial staff reporting to key personnel. (2) A discussion and description of the staffing requirements needed to fulfill all operations and associated functions, tasks, services, and areas of supervision necessary to operate Applicant on a day-to-day basis; and (3) The names and qualifications of individuals who are key persmmel or other managerial staff who will carry out the operations and associated functions. tasks, services, and supervision needed to run the Applicant on day-to-day basis. In particular, Applicant must identify such individuals who are responsible for risk management, treasury, clearing operations and compliance (and specify whether each such person is an employee or consultant/agent). EXHIBIT C- PARTICIPANT AND PRODUCT ELIGIBILITY Attach as Exhibit C, documents that demonstrate compliance with the participant and product eligibility requirements set forth in§ 39.12 of the Commission's regulations, including but not limited to: khammond on DSKBBV9HB2PROD with PROPOSALS2 a. VerDate Sep<11>2014 17:42 May 15, 2019 Participant Eligibility- Provide as Exhibit C-1, an explanation of the requirements for becoming a clearing member and how those requirements satisfy § 39.12 and, where applicable, support Applicant's compliance with other Core Principles. Applicant must address how its participant eligibility requirements comply with the core principles and regulations thereunder for financial resources, risk management, and operational capacity. The explanation also must include: (l) A final version of the membership agreement between Applicant and its clearing members that sets forth the full scope of respective rights and obligations; (2) A discussion of how Applicant will monitor for and enforce compliance with its eligibility criteria, especially minimum financial requirements; (3) An explanation of how the eligibility criteria are objective and allow for fair and open access to Applicant. Applicant must include an explanation of the differences bel ween various classes of membership or participation I hal might be based on different levels of capital and/or creditworthiness. Applicant must also include information about whether any differences exist in how Applicant will monitor and enforce the obligations of its various clearing members including any differences in access, privilege, margin levels, position limits, or other controls; (4) If Applicant allows intermediation, Applicant must describe the requirements applicable to those who may act as intermediaries on behalf of customers or other market participants; (5) A description of the program for monitoring the financial status of the clearing members on an ongoing basis; (6) The procedures that Applicant will follow in the event of the bankruptcy or insolvency of a clearing member, which did not result in a default to Applicant; Jkt 247001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.013</GPH> • 22294 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules b. (7) A description of whether and how Applicant would adjust clearing member participation under continuing eligibility criteria based on the financial, risk, or operational status of a clearing member; (8) A discussion of whether Applicant's clearing members will be required to be registered with the Cmrunission; and (9) A list of current or prospective clearing members. Tf a current or prospective clearing member is a Commission registrant, Applicant must identify the member's designated self-regulatory organization. Product Eligibility - Provide as Exhibit C-2, an Cli.'J)lanation of the criteria used to determine the eligibility of products submitted for clearing, including: (1) The regulatory status of each market on which a contract to be cleared by Applicant is traded (e.g., designated contract market, swap execution facility, not a registered market), and whether the market for which Applicant clears intends to join the Joint Audit Committee. For bilaterally executed agreements, contracts, or transactions not traded on a registered market Applicant must describe the nature of the related market and its interest in having the particular bilaterally executed agreement, contract, or transaction cleared; (2) The criteria, and the factors considered in establishing the criteria, for determining the types of products that will be cleared; (3) An explanation of how the criteria for deciding what products to clear take into account the different risks inherent in clearing different agreements, contracts, or transactions and how those criteria affect maintenance of assets to support the guarantee function in varying risk envirol1ll.lents; (4) A precise list of all the agreements, contracts, or transactions to be covered by Applicant's registration order, including the terms and conditions of all agreements, contracts, or transactions; (5) A forecast of expected volume and open interest at the outset of clearing operations as a derivatives clearing organization, after six months, and after one year of operation as a derivatives clearing organization; and (6) The mechanics of clearing each contract, such as reliance on exchange for physical, exchange for swap, or other substitution activity; whether the contracts are matched prior to submission for clearing or after submission; and other aspects of clearing mechanics that are relevant to understanding the products that would be eligible for clearing. EXHIBIT D- RISK MANAGEMENT Attach as Exhibit D, documents that demonstrate compliance with the risk management requirements set forth in§ 39.13 of the Commission's regulations, including but not limited to: khammond on DSKBBV9HB2PROD with PROPOSALS2 a. VerDate Sep<11>2014 17:42 May 15, 2019 Risk Management Framework - Provide as Exhibit D-1, a copy of Applicant's written policies, procedures, and controls, as approved by Applicant's Board of Directors, that establish Applicant's risk management framework as required by § 39 .13(b ). Applicant must also provide a description of the composition and responsibilities of Applicant's Risk Management Committee. Jkt 247001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.014</GPH> • Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules b. 22295 Measuring Risk- Provide as Exhibit D-2, a narrative explanation of how Applicant has projected and will continue to measure its counterparty risk exposure, including: ( 1) A description of the risk -based margin calculation methodology; (2) The assumptions upon which the methodology was designed. including the risk analysis tools and procedures employed in the design process; (3) An explanation as to whether other margining methodologies were considered and, if so, why they were not chosen; (4) A demonstration of the margin methodology as applied to real or hypothetical clearing scenarios; (5) A description of the data sources for inputs used in the methodology, e.g., historical price data reflecting market volatility over various periods of time; (6) A description of the sources of price data for the measurement of current exposures and the valuation models for addressing circumstances where pricing data is not readily available or reliable; (7) The frequency and circumstances under which the margin methodology will be reviewed and the criteria for deciding how often to review and whether to modify a margin methodology; (8) An independent validation of Applicant's systems for generating initial margin requirements, including its theoretical models; (9) The frequency of measuring counterparty risk exposures (mark to market), whether counterparty risk exposures are routinely measured on an intraday basis, whether Applicant has the operational capacity to measure counterparty risk exposures on an intraday basis, and the circumstances under which Applicant would conduct a non-routine intraday measurement of counterparty risk exposures; (10) Preliminary forecasts regarding future counterparty risk exposure and assumptions upon which such forecasts of exposure are based; (11) A description of any systems or software that Applicant will require clearing members to use in order to margin their positions in their internal bookkeeping systems, and whether and under what terms and conditions Applicant will provide such systems or software to clearing members; and (12) A description of the extent to which counterparty risk can be offset through the clearing process (i.e., the limitations, if any, on Applicant's duty to fulfill its obligations as the buyer to every seller and the seller to every buyer). Limiting Risk - Provide as Exhibit D-3, a narrative discussion addressing the specifics of Applicant's clearing activities, including: khammond on DSKBBV9HB2PROD with PROPOSALS2 (1) VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 How Applicant will collect financial information about its clearing members and other traders or market participants, monitor price movements, and mark to market, on a daily basis, the products and/or portfolios it clears; PO 00000 Frm 00071 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.015</GPH> c. 22296 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules (2) How Applicant will monitor accounts carried by clearing members, the accumulation of positions by clearing members and other market participants, and compliance with risk limits; and how it will use large trader infonnation; (3) How Applicant will detennine variation margin levels and outstanding initial margin due; (4) How Applicant will identify unusually large pays on a proactive basis before they occur; (5) Whether and how Applicant will compare price moves and position information to historical patterns and to the financial information collected from its clearing members; and how it will identify unusually large pays on a daily basis; (6) How Applicant will use various risk tools and procedures such as: (i) value-atrisk calculations; (ii) stress testing; (iii) back testing; and/or (iv) other risk management tools and procedures. If Applicant is currently clearing products for which it is seeking registration as a derivatives clearing organization, provide back testing results for actual portfolios containing each such product, which demonstrate margin coverage at least at t11e 99 percent confidence level over tl1e previous 252 trading days; (7) How Applicant will communicate with clearing members, settlement banks, other derivatives clearing organizations, designated contract markets, swap execution facilities, major swap participants, swap data repositories, and other entities in emergency situations or circumstances that might require immediate action by the Applicant; (8) How Applicant will monitor risk outside of its business hours; (9) How Applicant will review its clearing members' risk management practices; (10) Whether Applicant will impose credit limits and/or employ other risk filters (such as automatic system denial of entry of trades under certain conditions); (ll) Plans for handling "extreme market volatility" and how Applicant defines that term; (12) An explanation of how Applicant will be able to offset positions in order to manage risk including: (i) ensuring both Applicant and clearing members have the operational capacity to do so; and (ii) liquidity of the relevant market, especially with regard to bilaterally executed products; (13) Plans for managing accounts that are "too big" to liquidate and for conducting "what if' analyses on these accounts; (14) If options are involved, how Applicant will manage the different and more complex risk presented by these products; (16) VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 If Applicant intends to clear credit default swaps, credit default futures, and any derivatives that reference either credit default swaps or credit default futures, how Applicant will manage tl1e unique risks associated with clearing PO 00000 Frm 00072 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.016</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 (15) If Applicant intends to clear swaps, whether and how often Applicant will offer multilateral portfolio compression exercises for its clearing members; and Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22297 these products, including but not limited to liquidity risk, currency risk, seasonable risk, compounding risk, jump-to-default risk or similar jump risk. d. Existence of collateral (funds and assets) to apply to losses resulting from realized risk- Provide as Exhibit D-4: (l) An explanation of the factors, process, and methodology used for calculating and selling required collateral levels, the required inputs, the appropriateness of those inputs, and an illustrative example; (2) An analysis supporting the sufficiency of Applicant's collateral levels for capturing all or most price moves that may take place in one settlement cycle; (3) A description of how Applicant will value open positions and collateral assets; (4) A description and explanation of the forms of assets allowed as collateral, why they are acceptable, and whether there are any haircuts or concentration limits or charges on certain kinds of assets, including how often any such haircuts and concentration limits or charges are reviewed; (5) An explanation of how and when Applicant will collect collateral, whether and under what circumstances it will collect collateral on an intraday basis, and what will happen if collateral is not received in a timely manner. Include a proposed collateral collection schedule based on changes in market positions and collateral values; and (6) If options are involved, a full explanation of how Applicant will manage the associated risk through the use of collateral including, if applicable, a discussion of Applicant's option pricing model, how it establishes its implied volatility scan range, and other matters related to the complex matter of managing the risk associated with the clearing of option contracts. EXHIBIT E- SETTLEMENT PROCEDURES Attach as Exhibit E, documents that demonstrate compliance with the settlement procedures requirements set forth in§ 39.14 of the Commission's regulations, including but not limited to: khammond on DSKBBV9HB2PROD with PROPOSALS2 a. VerDate Sep<11>2014 17:42 May 15, 2019 Settlement - Provide as Exhibit E-1, a full description of the daily process of settling financial obligations on all open positions being cleared. This must include: (l) Procedures for completing settlements on a timely basis during normal market conditions (and no less frequently than once each business day); (2) Procedures for completing settlements on a timely basis in varying market circmnstances including in the event of a default by the clearing member creating the largest financial exposure for Applicant in extreme but plausible market conditions; (3) A description of how contracts will be marked to market on at least a daily basis; (4) Identification of the settlement banks used by Applicant (including identification of the lead settlement bank, if applicable) and a copy of Applicant's settlement bank agreement(s). Such settlement bank agreements must (i) outline daily cash settlement procedures, (ii) state clearly when settlement fund transfers will occur, (iii) provide procedures for settlements on Jkt 247001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.017</GPH> • 22298 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules bank holidays when the markets are open, and (iv) ensure that settlements are final when effected; (5) Identification of settlement banks that Applicant will allow its clearing members to use for margin calls and variation settlements; (6) A description of the criteria and review process used by Applicant when selecting selllement banks to be used by the Applicant or its clearing members, including criteria addressing the capitalization, creditworthiness, access to liquidity, operational reliability, and regulation or supervision of such settlement banks; (7) Procedures for monitoring the continued appropriateness of each approved settlement bank, including a description of how Applicant monitors the full range and concentration of its exposures to each settlement bank; (8) The specific means by which settlement instructions are communicated from Applicant to the settlement bank(s); (9) A timetable showing the Dow of funds associated with the settlement of financial obligations with respect to all cleared products for a 24-hour period or such other settlement timeframe specified with respect to a particular product; this may be presented in the form of a chart, as in the following example: FORM DCO -SAMPLE SETTLEMENT CYCLE CHART VerDate Sep<11>2014 TRADE DATE - T [INSERT TIME ZONE] [INSERT EXACT TIMES BELOW] EXAMPLE OF SETTLEMENT ACTIVITY FOR WHICH TIMES SHOULD BE PROVIDED T _ _ pm Last market closes (end of regular trading hours). T Approx. __ pm DCO/DCM/SEF establishes daily settlement price for each product based on information generated by its [INSERT NAME OF APPLICABLE CLEARING SYSTEM]. T By _ _ pm Clearing members' position information for intraday settlement is obtained from DCO's clearing system. T+1: Approx. _ _ am DCO provides daily initial margin (1M) and settlement variation/option premium (SVOP) amounts to clearing members and banks. T+1: By _ _ am Banks commit to pay daily IM and SVOP amounts. T+1: Approx. _ _ am Banks pay daily IM and SVOP amounts from clearing members to DCO. T+1: Approx. _am Banks pay daily IM and SVOP amounts from DCO to clearing members. T Approx. __ pm DCO/DCM/SEF determines prices for intraday settlement T Approx. __ pm Clearing members' position information for intraday settlement is obtained from DCO's clearing system. T By approx. __ pm DCO provides intraday IM and SVOP amounts to banks and clearing members. T By _ _ pm Banks commit to pay intraday IM and SVOP amounts. T Approx. __ pm Banks pay intraday IM and SVOP amounts from clearing members to DCO. 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.018</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 [Specify U.S. Dollar or other currency as applicable] Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules T Approx. __ pm 22299 Banks pay intraday IM and SVOP amounts from DCO to clearing members. (10) A description of what happens in the event that there are insufficient funds in a clearing member's settlement account (11) An explanation of how and when Applicant will collect variation margin, whether and under what circumstances it will collect variation margin on an intraday basis, what will happen if variation margin is not received in a timely manner, and a proposed variation margin collection schedule based on changes in market prices; (12) All the information above, to the extent relevant, for any products cleared that may be denominated in a foreign currency; and (13) Witl1 respect to physical settlements, identify Applicant's rules that clearly state each obligation of Applicant with respect to physical deliveries, and explain how Applicant intends to identify and manage risks arising from physical settlement. b. c. Recordkeeping- Provide as Exhibit E-2, a full description ofthe following: (l) The nature and quality of the information collected concerning the flow of funds involved in clearing and settlement; and (2) How such information will be recorded, maintained, and accessed. Relationships with other clearing organizations - Provide as Exhibit E-3, a description of Applicant's relationships with other derivatives clearing organizations, clearing agencies, financial market utilities, or foreign entities that perform similar functions, including how compliance with tl1e terms and conditions of agreements or arrangements with such other entities will be satisfied, e.g., any netting or offset arrangements, cross-margining, portfolio margining, linkage, common banking, common clearing programs or limited guaranty agreements or arrangements. EXHIBIT F- TREATMENT OF FUNDS Attach as Exhibit F. documents that demonstrate compliance with the treatment of funds requirements set forth in§ 39.15 of the Commission's regulations, including but not limited to: khammond on DSKBBV9HB2PROD with PROPOSALS2 a. b. VerDate Sep<11>2014 17:42 May 15, 2019 Safe custody- Provide as Exhibit F-1, documents that demonstrate: (l) How Applicant will ensure the safekeeping of funds and assets belonging to clearing members and their customers in depositories and how Applicant will minimize the risk of loss or of delay in accessing such funds and assets; (2) The depositories that will hold such funds and assets and any written agreements between or among such depositories, Applicant, or its clearing members regarding tl1e legal status of tl1e funds and assets and the specific conditions or prerequisites for movement of the funds and assets; and (3) How Applicant will limit the concentration of risk in depositories where such funds and assets arc deposited. Segregation of customer and proprietarr funds and assets- Provide as Exhibit F-2, documents that demonstrate: Jkt 247001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.019</GPH> • 22300 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules c. (l) The appropriate segregation of customer funds and assets and associated acknowledgment documentation, including the acknowledgment letters required under §§ 1.20 and/or 22.5, as applicable, for each bank or trust company that Applicant will usc for the deposit of customer funds and assets; and (2) Requirements or restrictions regarding commingling customer funds and assets with proprietary funds and assets, obligating customer funds and assets for any purpose other than to purchase, clear, and settle the products Applicant is clearing, procedures regarding customer funds and assets which are subject to cross-margin or similar agreements, and any other aspects of the segregation of customer funds and assets. investment standards- Provide as Exhibit F-3, documents that demonstrate: (l) Policies and procedures to ensure that funds and assets belonging to clearing members and their customers would only be invested in instruments with minimal credit, market, and liquidity risks, and that any investment of customer funds or assets would comply with the requirements of§ 1.25; and (2) How Applicant will obtain and keep associated records and data regarding the details of such investments. EXHIBIT G- DEFAULT RULES AND PROCEDURES Attach as Exhibit G, documents that demonstrate compliance with the default rules and procedures requirements set forth in § 39.16 of the Commission's regulations, including but not limited to: a. Default Management Plan - Applicant must provide a copy of its written default management plan which must contain all of the information required by § 39.16(b), along with Applicant's most recently documented results of a test of its default management plan. b. Definition of default- Applicant must describe or otherwise document: c. (l) The events (activities, lapses, or situations) tl1at will constitute a clearing member default; (2) What action Applicant can take upon a default and how Applicant will otherwise enforce the rules applicable in the event of default, including the steps and the sequence of the steps that will be followed. Identify whether a Default Management Committee exists and, if so, its role in the default process: and (3) An example of a hypothetical default scenario and the results of the default management process used in the scenario. Remedial action- Applicant must describe or otl1erwise document: khammond on DSKBBV9HB2PROD with PROPOSALS2 (l) VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 The autl10rity and methods by which Applicant may take appropriate action in the event of the default of a clearing member which may include, among other things, liquidating positions, hedging, auctioning, allocating (including any obligations of clearing members to participate in auctions or to accept allocations), and transferring of customer accom1ts to anotl1er clearing member (including an explanation of the movement of positions and collateral on deposit); and PO 00000 Frm 00076 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.020</GPH> • Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules (2) d. 22301 Actions taken by a clearing member or other events that would put a clearing member on Applicant's "watch list" or similar device. Process to address shortfalls - Applicant must describe or otherwise document: (1) Procedures for the prompt application of Applicant and/or clearing member financial resources to address monetary shortfalls resulting from a default; (2) How Applicant will make publicly available its default rules including a description of the priority of application of financial resources in the event of default (i.e., the "waterfall"); and (3) How Applicant will take timely action to contain losses and liquidity pressures and to continue to meet each obligation of Applicant. e. Use of cross-margin programs -Describe or otherwise document, as applicable, how cross-margining programs will provide for fair and efficient means of covering losses in the event of a default of any clearing member participating in the program. f. Customer prioritv rule - Describe or otherwise document rules and procedures regarding priority of customer accounts over proprietary accounts of defaulting clearing members and, where applicable, specifically in the context of specialized margin reduction programs such as cross-margining or common banking arrangements with other derivatives clearing organizations, clearing agencies, financial market utilities, or foreign entities that perform similar functions. EXHIBIT H- RULE ENFORCEMENT • Attach as Exhibit H, documents that demonstrate compliance with the mle enforcement requirements set forth in § 39.17 of the Commission's regulations, including but not limited to: a. Surveillance - Describe or otherwise document arrangements and resources for the effective monitoring of compliance with Applicant's rules. b. Enforcement- Describe or otherwise document: c. (I) Arrangements and resources for enforcing compliance with Applicant's mles and addressing instances of non-compliance, including disciplinary tools such as limiting, suspending, or terminating a clearing member's access or member privileges; and (2) The standards and any procedural protections Applicant will follow in imposing any such enforcement measure. Dispute resolution- Describe or otherwise document arrangements and resources for resolution of disputes between clearing members and Applicant. EXHIBIT I - SYSTEM SAFEGUARDS Attach as Exhibit I, documents that demonstrate compliance with the system safeguards requirements set forth in§ 39.18 of the Commission's regulations, including but not limited to: khammond on DSKBBV9HB2PROD with PROPOSALS2 a. A description of Applicant's program of risk analysis and oversight with respect to its operations and automated systems. Tiris program must be designed to ensure daily processing, clearing, and settlement of trcmsactions and address each of the following categories of risk: (1) VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Information security; PO 00000 Frm 00077 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.021</GPH> • 22302 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules b. (2) Business continuity-disaster recovery planning and resources; (3) Capacity and performance planning; (4) Systems operations; (5) Systems development and quality assurance; and (6) Physical security and envirorunental controls. An explanation of how Applicant will establish and maintain resources that allow for the fulfillment of its program of risk analysis and oversight with respect to its operations and automated systems, and a description of such resources. including: (1) A description of how Applicant will periodically verify that its resources are adequate to ensure daily processing, clearing, and, settlement; (2) A demonstration that Applicant's automated systems are reliable, secure, and have (and will continue to have) adequate scalable capacity; (3) A description of the physical, technological and personnel resources and procedures used by Applicant as part of its business continuity and disaster recovery plan, and support for the conclusion that these resources are sufficient to enable the Applicant to resume daily processing, clearing, and settlement no later than the next business day following a disruption; and (4) A statement identifying which such resources are Applicant's own resources and which are provided by a service provider (outsourced). For resources that are outsourced, provide (i) all contracts governing the outsourcing arrangements, including all schedules and other supplemental materials, and (ii) a demonstration that Applicant employs personnel with the expertise necessary to enable them to supervise the service provider's delivery of the services. c. An explanation of how Applicant will ensure the proper functioning of its systems. including its program for t11e periodic objective testing and review of its systems and back-up facilities (including all of its own and outsourced resources), and verification tl1at all such resources will work effectively together; d. Identification of the persons conducting the testing, including information as to their qualifications and independence; e. A description of Applicant's emergency procedures. including a copy of its written plan for business continuity and disaster recovery and a description of how Applicant will coordinate its business continuity and disaster recovery plan (including testing) with its clearing members and providers of essential services such as telecommunications, power, and water; and f. A description of how Applicant will report exceptional events and planned changes to the Commission as required by §§ 39 .18(g) and 39 .18(h). EXHIBIT J - REPORTING Attach as Exhibit J, documents that demonstrate compliance with the reporting requirements set forth in§ 39.19 of the Cmrnnission's regulations, including but not limited to: a. VerDate Sep<11>2014 17:42 May 15, 2019 A description of how Applicant will make available to Commission staff all the information Commission staff needs in order to carry out effective oversight, e.g., Jkt 247001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.022</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 • Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22303 the internal staff procedures Applicant will follow to provide such information. If the laws or regulations of any foreign country in which Applicant is incorporated or organized require any approval(s) by a foreign regulatory authority with respect to the provision of any information to the Connuission, Applicant must submit evidence that such approval(s) have been obtained. b. A representation that the Applicant will submit the information required to satisfy the daily, quarterly, annual, event-specific, and requested reporting requirements specified in § 39.19(c) of the Connuission's regulations, in the format and manner and within the time specified by the Connnission. EXHIBIT K- RECORDKEEPING • Attach as Exhibit K, documents that demonstrate compliance with the recordkeeping requirements set forth in§ 39.20 of the Coll1111ission 's regulations, including but not limited to: a. Applicant's recordkeeping and record retention policies and procedures; b. The different activities related to the entity as a derivatives clearing organization for which it must maintain records; c. The manner in which records relating to swaps and swap data are gathered and maintained; and d. How Applicant will satisfy the performance standards of § 1.31 as applicable to derivatives clearing organizations, including c. (1) What "full" or "complete" will encompass with respect to each type of book or record that will be maintained; (2) The form and manner in which books or records will be compiled and maintained with respect to each type of activity for which such books or records will be kept; (3) Confinnation that books and records will be open to inspection by any representative of the Coll1111ission or of the U.S. Department of Justice; (4) How long books and records will be readily available and how they will be made readily available during the first two years; and How long books and records will be maintained (and confirmation that, in any event they will be maintained as required in§ 1.31). EXHIBIT L- PUBLIC INFORMATION VerDate Sep<11>2014 Attach as Exhibit L, documents that demonstrate compliance with the public infom1ation requirements set forth in § 39.21 of the Coll1111ission' s regulations, including but not limited to: 17:42 May 15, 2019 a. Applicant's procedures for making its rulebook, a list of all current clearing members, and all other information listed in § 39.2l(c) readily available to the general public, in a timely manner, by posting such information on Applicant's website; b. The URLs for Applicant's website for each item listed in § 39.21(c)(l) through (c)(9). c. Any other information routinely made available to the public by Applicant; Jkt 247001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.023</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 • 22304 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules d. How Applicant will make information available to clearing members and market participants in order to allow such persons to become familiar with Applicant's procedures before participating in clearing operations; and e. How clearing members will be informed of their specific rights and obligations preceding a default and upon a default, and of the specific rights, options, and obligations of Applicant preceding and upon a clearing member's default. EXHIBIT M- INFORMATION SHARING • Attach as Exhibit M, documents that demonstrate compliance with the information sharing requirements set forth in§ 39.22 of the Cmmnission's regulations, including but not limited to: a. The appropriate and applicable inforrnation sharing agreements to which Applicant is, or intends to be, a party including any domestic or international informationsharing agreements or arrangements, whether formal or informal, which involve or relate to Applicant's operations, especially as it relates to measuring and addressing counterparty risk; b. A description of the types of information expected to be shared and how that information will be shared; c. An explanation as to how information obtained pursuant to any information-sharing agreements or arrangements would be used to further the objectives of Applicant's risk management program and any of its surveillance programs including financial surveillance and continuing eligibility of its clearing members; and d. An explanation as to how Applicant expects to obtain accurate information pursuant to the information-sharing agreement or arrangement and the mechanisms or procedures which would allow for timely use and application of all information. EXHIBIT N- ANTITRUST CONSIDERATIONS • Attach as Exhibit N. docnments that demonstrate compliance with the antitrust considerations requirements set forth in § 39.23 of the Commission's regulations, including but not limited to policies or procedures to ensure compliance with the antitmst considerations requirements. EXHIBIT 0 - GOVERNANCE • Attach as Exhibit 0, documents that demonstrate compliance with the governance fitness standards requirements set forth in § 39.24 of the Commission's regulations, including but not limited to: a. A copy of: (l) The charter (or mission statement) of Applicant (if not attached as Exhibit A-8); (3) If another entity "operates" the Applicant, the charter (or mission statement) of such entity's Board of Directors (if not attached as Exhibit A-8); and a description of the manner in which the Applicant will ensure that such entity's officers, directors, employees, and agents and such entity's books and records VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.024</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 (2) The charter (or mission statement) of Applicant's Board of Directors, each committee composed entirely or in part of members of the Board of Directors (including any Executive Committee), as well as each other committee that has the authority to amend or constrain actions of Applicant's Board of Directors (if not attached as Exhibit A-8); Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22305 shall be subject to the authority of the Commission pursuant to the Act and the Conuuission's regulations thereunder; and VerDate Sep<11>2014 17:42 May 15, 2019 b. A description of how Applicant's governance arrangements place a high priority on Applicant's safety and efficiency and explicitly support the stability of the broader financial system and other relevant public interest considerations of clearing members, customers of clearing members, and other relevant stakeholders; c. A description of how the Board of Directors makes certain that Applicant's design, rules, overall strategy, and major decisions appropriately reflect the legitimate interests of clearing members, customers of clearing members, and other relevant stakeholders; d. A description of how major decisions of the Board of Directors are clearly disclosed to clearing members and other relevant stakeholders, and will be disclosed to the Commission, and how major decisions of the Board of Directors having a broad market impact are clearly disclosed to the public, to the extent consistent with other statutory and regulatory requirements on confidentiality and disclosure; e. A description of how Applicant's governance arrangements are disclosed, as appropriate, to clearing members, customers of clearing members, Applicant's owners, and the public, and will be disclosed to the Commission, to the extent consistent with other statutory and regulatory requirements on confidentiality and disclosure; f. A description of how Applicant's governance arrangements: (1) describe the structure pursuant to which the Board of Directors, committees, and management operate; (2) include clear and direct lines of responsibility and accountability; (3) clearly specify the roles and responsibilities of the Board of Directors and its committees, including the establishment of a clear and documented risk management framework; and (4) clearly specify the roles and responsibilities of management; g. A description of the procedures pursuant to which Applicant's Board of Directors oversees Applicant's chief risk officer, risk management committee, and material risk decisions; h. A description of how Applicant provides risk management, internal control, and internal audit personnel with sufficient independence, authority, resources, and access to the Board of Directors so that the operations of Applicant are consistent with its risk management framework; i. A description of how Applicant's governance arrangements assign responsibility and accountability for risk decisions, including in crises and emergencies, and assign responsibility for implementing default rules and procedures, system safeguard rules and procedures, and as applicable, recovery and wind-down plans; j. A description of the fitness standards applicable to members of the Board of Directors, members of any disciplinary committee, clearing members, any other individual or entity with direct access to settlement or clearing activities, and any party affiliated with any of the above individuals or entities, including a description or other documentation explaining how Applicant will collect and verify information that supports compliance with the fitness standards and how Applicant will enforce compliance with such standards; and Jkt 247001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.025</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 (4) An internal organizational chart showing the lines of responsibility and accountability for each operational unit. 22306 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules k. A description of how Applicant will make certain that: ( 1) its Board of Directors consists of suitable individuals having appropriate skills and incentives; (2) the performance of the Board of Directors and individual directors are reviewed on a regular basis; and (3) managers have the appropriate experience, skills, and integrity necessary to discharge operational and risk management responsibilities. EXHIBIT P- CONFLICTS OF INTEREST • Attach as Exhibit P, documents that demonstrate compliance with the conflicts of interest requirements set forth in§ 39.25 of the Commission's regulations, including but not limited to: a. A description of Applicant's rules to minimize conflicts of interest in its decisionmaking process and how it enforces those rules; b. A description of Applicant's process for resolving such conflicts of interest or for making fair and non-biased decisions in the event of a conflict of interest; and c. A description of Applicant's procedures for identifying, addressing, and managing conflicts of interest involving members of its Board of Directors. EXHIBIT Q- COMPOSITION OF GOVERNING BOARDS • Attach as Exhibit Q, documents that demonstrate compliance with the composition of governing boards requirements set forth in§ 39.26, including but not limited to documentation describing the composition of Applicant's Board of Directors, including the number of market participants. EXHIBIT R- LEGAL RISK CONSIDERATIONS Attach as Exhibit R, documents that demonstrate compliance with the legal risk considerations requirements set forth in§ 39.27 of the Commission's regulations, including but not limited to: a. khammond on DSKBBV9HB2PROD with PROPOSALS2 b. VerDate Sep<11>2014 17:42 May 15, 2019 A discussion of how Applicant operates pursuant to a well-founded, transparent, and enforceable legal framework that addresses each aspect of the activities of Applicant. The framework must provide for Applicant to act as a counterparty, including, as applicable: (1) Novation; (2) Netting arrangements; (3) Applicant's interest in collateral (including margin); (4) The steps that Applicant can take to address a default of a clearing member, including but not limited to, the unimpeded ability to liquidate collateral and close out or transfer positions in a timely manner; (5) Finality of settlement and funds transfers that are irrevocable and unconditional when effected (no later than when Applicant's accounts are debited and credited); and (6) Other significant aspects of Applicant's operations, risk management procedures, and related requirements. If Applicant provides, or will provide, clearing services outside the United States, Applicant must provide a memorandum from local counsel analyzing insolvency issues in the foreign jurisdiction where Applicant is based, which should describe or otherwise document: Jkt 247001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.026</GPH> • Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules ( 1) The manner in which Applicant's clearing rules and procedures pertaining to customer funds ("FCM Clearing Rules") segregate such funds, in accordance with section 4d of the Act and the Commission's regulations ("ring-fence"): (2) The basis for the conclusion that the arrangements to ring-fence customer funds set forth in the FCM Clearing Rules would be effective, under any relevant non-U.S. law or regulation, in the insolvency of a futures commission merchant ("FCM") clearing member or of the Applicant itself, including how such customer funds would not, therefore, form part of the general estate for distribution to the illlsecured creditors of an insolvent FCM clearing member or of the Applicant; (3) The basis for the conclusion that the laws of the jurisdiction in which Applicant is domiciled and the laws of any other relevant jurisdiction (e.g., other jurisdictions in which customer funds may be held) support the enforceability of the FCM Clearing Rules; (4) The basis for the conclusion that a local court or insolvency official in the jurisdiction in which Applicant is domiciled (and any other relevant jurisdiction) respect the choice of U.S. law in governing specific aspects of the FCM Clearing Rules to determine the extent of rights that Applicant has with respect to customer funds and be bound to follow the FCM Clearing Rules with respect to customer funds. The memorandum should explain whether the application of U.S. law to customer funds would contravene any public policy in the jurisdiction in which Applicant is domiciled (or any other relevant jurisdiction); (5) The basis for the conclusion that the FCM Clearing Rules are enforceable (i.e., the conclusion that the Applicant may take default action, pursuant to the FCM Clearing Rules, discretely against each FCM clearing member in respect of FCM customer accoilllts without interference from the law of insolvency applicable to the FCM clearing member or to Applicant); and (6) The basis for the conclusion that following the default of an FCM clearing member or of the Applicant, Applicant will be able to comply with the provisions of the U.S. Bankruptcy Code and Commission regulations with respect to the pro rata distribution requirements set forth therein, as well as comply with any relevant order or direction by a U.S. court (including a bankruptcy court) regarding the distribution of customer funds. 22307 32. Revise appendix B to part 39 to read as follows: ■ VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Appendix B to Part 39—Subpart C Election Form PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.027</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 In all cases. the memorandum must include separate discussions of the legal analysis and conclusions with respect to: (a) the default of the Applicant, and (b) the default of an FCM clearing member. 22308 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION SUBPART C ELECTION FORM GENERAL INSTRUCTIONS: Intentional misstatements or omissions offact may constitute federal criminal violations (7 U.S.C. 13 and 18 U.S.C. 1001). DEFINITIONS Unless the context requires otherwise, all terms used in this Subpart C Election Form have the same meaning as in the Commodity Exchange Act ("Act"), and in the General Rules and Regulations of the Commodity Futures Trading Commission ("Commission") thereunder. All references to Commission regulations are found at 17 CFR Ch. I. For purposes of this Subpart C Election Form, the term "Applicant" shall mean a derivatives clearing organization that is filing this Subpart C Election Form with a Form DCO as part of an application for registration as a derivatives clearing organization pursuant to section 5b of the Act and 17 CFR 39.3(a). VerDate Sep<11>2014 1. Any derivatives clearing organization requesting an election to become subject to subpart C of part 39 of the Commission's regulations must file this Subpart C Election Form. The Subpart C Election Form includes the election to be subject to the provisions of subpart C of part 39 of the Commission's regulations, certain required certifications, disclosures, and exhibits, and any supplements or amendments thereto filed pursuant to 17 CFR 39.31(b) or (c) (collectively, the "Subpart C Election Form"). 2. Any derivatives clearing organization wishing to request an extension of up to one year to comply with any of the provisions of 17 CFR 39.34, 17 CFR 39.35 or 17 CFR 39.39, pursuant to 17 CFR 39.34(d) or 17 CFR 39.39(f) must do so prior to filing this Subpart C Election Form. Such requests shall become part of this Subpart C Election Form. 3. Individuals' names, except the executing signature, shall be given in full (Last Name, First Name, Middle Name). 4. The signatures required in this Subpart C Election Form shall be the manual signatures of a duly authorized representative of the derivatives clearing organization as follows: If the Subpart C Election Form is filed by a corporation, it must be signed in the name of the corporation by a principal officer duly authorized; if filed by a limited liability company, it must be signed in the name of the limited liability company by a manager or member duly authorized to sign on the limited liability company's behalf; if filed by a partnership, it must be signed in the name of the partnership by a general partner duly authorized; if filed by an unincorporated organization or association which is not a partnership, it must be signed in the name of such organization or association by the managing agent, i.e., a duly authorized person who directs or manages or who participates in the directing or managing of its affairs. 5. All applicable items must be answered in full. 6. Under section 5b of the Act and the Commission's regulations thereunder, the Commission is authorized to solicit the information required to be supplied by this Subpart C Election Form from any Applicant seeking registration as a derivatives clearing organization and from any registered derivatives clearing organization. 7. Disclosure of the information specified in this Subpart C Election Form is mandatory prior to the processing of the election to become a derivatives clearing organization subject to the provisions of 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.028</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 GENERAL INSTRUCTIONS Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22309 subpart C of part 39 of the Commission's regulations. The Commission may determine that additional information is required in order to process such election. 8. A Subpart C Election Form that is not prepared and executed in compliance with applicable requirements and instructions may be returned as not acceptable for filing. Acceptance of this Subpart C Election Form, however, shall not constitute a finding that the Subpart C Election Form is acceptable as filed or that the information is true, current or complete. 9. As provided in 17 CFR 39.3l(d), except in cases where a derivatives clearing organization submits a request for confidential treatment with the Secretary of the Commission pursuant to the Freedom of Information Act and 17 CFR 145.9, information supplied in this Subpart C Election Form will be included routinely in the public files of the Commission and will be made available for inspection by any interested person. APPLICATION AMENDMENTS 1. 17 CFR 39.3l(b)(3) and (c)(4) require a derivatives clearing organization that has submitted a Subpart C Election Form to promptly amend its Subpart C Election Form if it discovers a material omission or error in, or if there is a material change in, the information provided to the Commission in the Subpart C Election Form or other information provided in connection with the Subpart C Election Form. 2. When amending a Subpart C Election Form, a derivatives clearing organization must re-file the Election and Certifications page, amended if necessary, and including all required executing signatures, and attach thereto revised exhibits or other materials marked to show changes, as applicable. VerDate Sep<11>2014 1. This Subpart C Election Form must be filed electronically with the Secretary of the Commission in the format and manner specified by the Commission. 2. Any supplemental information must be filed electronically with the Division of Clearing and Risk, or any successor division, in the format and manner specified by the Commission. 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.029</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 WHERE TO FILE 22310 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION SUBPART C ELECTION FORM ELECTION AND CERTIFICATIONS Exact Name of the Derivatives Clearing Organization (as set forth in its charter, if an Applicant, or as set forth in its most recent order of registration, if registered with the Commission) D Check here and complete sections 1 and 3 below, if the organization is an Applicant. D Check here and complete sections 2 and 3 below, if the organization currently is registered with the Commission as a derivatives clearing organization. 1. The derivatives clearing organization named above hereby elects to become subject to the provisions of subpart C of part 39 of the Commission's regulations in the event that the Commission approves its application for registration as a derivatives clearing organization. The derivatives clearing organization and the undersigned each certify that, in the event that the Commission approves the derivatives clearing organization's application for registration and pennits its election to become subject to subpart C of part 39 of the Commission's regulations: a. The derivatives clearing organization will be in compliance with such regulations as of the date set forth in the notice thereof provided by the Commission pursuant to 17 CFR 39.31(c)(2), except to the limited extent that the Commission has granted the derivatives clearing organization an extension of time to comply with: ( 1) specified provisions of 17 CFR 39.34, pursuant to 17 CFR 39.34(d); and/or (2) specified provisions ofl7 CFR 39.35 and/or 17 CFR 39.39, pursuant to 17 CFR 39.39(f); b. The derivatives clearing organization will be in compliance with all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which t11e Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has granted an extension of time to comply in accordance with the terms of such extensions; and c. The derivatives clearing organization will remain in compliance with the provisions contained in subpart C of part 39 of the Commission's regulations until this election is rescinded pursuantto 17 CFR 3 9.31 (e). Name of Derivatives Clearing Organization By: _______________________________________________________________ Manual Signature of Duly Authorized Person VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.030</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Print Name and Title of Signatory Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 2. 22311 The derivatives clearing organization named above hereby elects to become subject to the provisions of subpart C of part 39 of the Commission's regulations as of: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ("Effective Date") [insert date, which must be at least 10 business days after the date this Subpart C Election Form is filed with the Commission]. The derivatives clearing organization and the undersigned each certify that: a. As of the Effective Date set forth above, the derivatives clearing organization shall be in compliance with subpart C of part 39 of the Commission's regulations, except to the limited extent that the Commission has granted the derivatives clearing organization an extension of time to comply with: (1) specified provisions of 17 CFR 39.34, pursuantto 17 CFR 39.34(d); and/or (2) specified provisions of 17 CFR 39.35 and/or 17 CFR 39.39, pursuantto 17 CFR 39.39(f); b. The derivatives clearing organization will be in compliance with all provisions of 17 CFR 39.34, 39.35 and/or 39.39 for which the Commission, pursuant to 17 CFR 39.34(d) and/or 17 CFR 39.39(f), has granted an extension of time to comply in accordance with the terms of such extensions; and c. The derivatives clearing organization will remain in compliance with provisions contained in subpart C of part 39 of the Commission's regulations until this election is rescinded pursuant to 17 CFR 39.31(e). Name of Derivatives Clearing Organization By: _____________________________________________________________ Manual Signature of Duly Authorized Person Print Name and Title of Signatory 3. The derivatives clearing organization named above has duly caused this Subpart C Election Form (which includes, as an integral part thereof, the Election and Certifications and all Disclosures and day of Exhibits) to be signed on its behalf by its duly authorized representative as of the _______________, 20 The derivatives clearing organization and the undersigned each represent hereby that, to the best of their knowledge, all information contained in this Subpart C Election Form is true, current and complete in all material respects. It is understood that all required items including, without limitation, the Election and Certifications and Disclosures and Exhibits, are considered integral parts of this Subpart C Election Form. Name of Derivatives Clearing Organization By: _____________________________________________________________ Manual Signature of Duly Authorized Person VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.031</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Print Name and Title of Signatory 22312 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules COMMODITY FUTURES TRADING COMMISSION PART 39, SUBPART C ELECTION FORM DISCLOSURES AND EXHIBITS Each derivatives clearing organization that requests an election to become subject to the provisions set forth in subpart C of part 39 of the Commission's regulations shall provide the Disclosures and Exhibits set forth below: DISCLOSURES: The derivatives clearing organization shall publish on its website in a readily identifiable location, the following documents that are required to be completed pursuant to 17 CFR 39.37: 1. The derivatives clearing organization's responses to the Disclosure Framework for Financial Market Infrastructures ("Disclosure Framework"), published by the Committee on Payments and Market Infrastructure ("CPMI") and the Board of the International Organization of Securities Conunissions ("IOSCO"). The derivatives clearing organization's responses must be completed in accordance with section 2.0 and Annex A of the Disclosure Framework and must fully explain how the derivatives clearing organization observes the Principles for Financial Market Infrastructures ("PFMis") published by CPMI-IOSCO. Provide the URL to the specific page on the derivatives clearing organization's website where its responses to the Disclosure Framework may be fom1d: 2. The most recent quantitative disclosure prepared by the derivatives clearing organization that satisfies the Public Quantitative Disclosure Standards for Central Counterparties published by CPMI-IOSCO ("Quantitative Disclosure"). If applicable, provide the URL to the specific page on the derivatives clearing organization's website where its Quantitative Disclosure may be found: EXHIBITS: VerDate Sep<11>2014 l. The derivatives clearing organization must include a Table of Contents listing each Exhibit required by this Subpart C Election Form. 2. If the derivatives clearing organization is an Applicant in its Form DCO, the derivatives clearing organization may summarize such information and provide a cross-reference to the Exhibit in this Subpart C Election Fonn that contains the required information. 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.032</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 EXHIBIT INSTRUCTIONS: Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22313 The derivatives clearing organization shall provide the following Exhibits to this Subpart C Election Form: EXHIBIT A- COMPLIANCE WITH SUBPART C Attach, as Exhibit A, a regulatory compliance chart that sets forth citations to the relevant rules, policies, and procedures of the derivatives clearing organization that address§§ 39.32-39.39 of the Conunission's regulations and a narrative sununary of the marmer in which the derivatives clearing organization will comply with each regulation. The narrative summary shall: (a) specifically and meaningfully explain the manner in which the derivatives clearing organization will comply with each such regulation; (b) sufficiently integrate references to documents contained in the exhibits to tllis Subpart C Election Form to clearly convey the derivatives clearing organization's policies and procedures with respect to each regulation; and (c) readily identify within such exhibits those derivatives clearing organization rules and governing documents that support the certifications set forth in this Subpart C Election Form. The narrative summary may be included as part of the compliance chart required by Exhibit A or a separate document within Exhibit A. All citations and compliance summaries shall be separated by individual regulation and shall be clearly labeled with the corresponding regulation. EXHIBIT B- FINANCIAL RESOURCES Attach, as Exhibit B, infonnation and documents that demonstrate compliance with tl1e financial resource requirements set forth in § 39.33 of the Commission's regulations, including but not limited to: a. Valuation of financial resources - Attach as Exhibit B-1, a demonstration that assessments for additional guaranty fund contributions (i.e., guaranty fund contributions that are not prefunded) are not included in calculating tl1e financial resources available to meet the derivatives clearing organization's obligations under§ 39.33(a) or§ 39.ll(a)(1). b. Liquidity resources- Attach as Exhibit B-2, a demonstration tl1at the derivatives clearing organization maintains eligible liquidity resources as required under~ 39.33(c). c. Liquidity providers- Attach as Exhibit B-3, a demonstration that the derivatives clearing organization's liquidity providers meet the requirements as set forth in§ 39.33(d). d. Documentation of financial resources and liquidity resources - Attach as Exhibit B-4, a demonstration that the derivatives clearing organization docmnents its supporting rationale for, and has appropriate governance arrangements relating to, the amount of total financial resources it maintains pursuant to § 39.33(a) and the amount of total liquidity resources it maintains pursuant to§ 39.33(c). EXHIBIT C- SYSTEM SAFEGUARDS Attach, as Exhibit C, infonnation and documents that demonstrate compliance with the system safeguards requirements set forth in § 39.34 of the Commission's regulations, including but not limited to: VerDate Sep<11>2014 17:42 May 15, 2019 Attach as Exhibit C-1, a demonstration that, notwitl1standing § 39.18(c)(2), the business continuity and disaster recovery plan described in § 39.18(c)( 1) and the physical, technological, and personnel resources described in § 39.18(c)(l) enable the derivatives clearing organization to recover its operations and rcslU1lc daily processing, clearing, and settlement no later than two hours following the disruption, for any disruption including a wide-scale disruption. Jkt 247001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.033</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 a. 22314 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules b. Attach as Exhibit C-2, a demonstration that the derivatives clearing organization maintains a degree of geographic dispersal of physical, technological and personnel resources consistent with the requirements set forth in § 39 .34(b ). c. Attach as Exhibit C-3, a demonstration that the derivatives clearing organization conducts regular, periodic tests of its business continuity and disaster recovery plans and resources and its capacity to achieve the required recovery time objective in the event of a wide-scale disruption, and that the provisions of§ 39.18(e) apply to such testing. EXHIBIT D - DEFAULT RULES AND PROCEDURES FOR UNCOVERED LOSSES OR SHORTFALLS Attach, as Exhibit D, information and documents that demonstrate compliance with the requirements for default rules and procedures for uncovered losses or shortfalls set forth in§ 39.35 of the Commission's regulations, including but not limited to: a. Allocation of uncovered credit losses - Attach as Exhibit D-1, a demonstration that the derivatives clearing organization has explicit rules and procedures that address fully any loss arising from any individual or combined default relating to any clearing member's obligations to the derivatives clearing organization. b. Allocation of uncovered liguiditv shortfalls- Attach as Exhibit D-2, a demonstration that the derivatives clearing organization has established rules and/or procedures that enable it to promptly meet all of its settlement obligations, on a same day and, as appropriate, intraday and multiday basis, in the context of the occurrence of the scenarios set forth in § 39.35(b)(l)(i) and (ii). The derivatives clearing organization must demonstrate how such rules and procedures comply with the requirements of§ 39.35(b)(2). EXHIBIT E- RISK MANAGEMENT VerDate Sep<11>2014 a. Stress tests of financial resources - Attach as Exhibit E-1, a demonstration that the derivatives clearing organization conducts stress tests of its financial resources in accordance with the standards and practices set forth in§ 39.36(a); b. Sensitivitv analysis of margin model- Attach as Exhibit E-2, a demonstration that the derivatives clearing organization conducts on a monthly basis or more frequently as appropriate, a sensitivity analysis of its margin models to analyze and monitor model performance and overall margin coverage. The derivatives clearing organization shall demonstrate that the sensitivity analysis is conducted on both actual and hypothetical positions and in accordance with the requirements set forth in§ 39.36(b)(2) and (3); c. Stress tests of liguiditv resources - Attach as Exhibit E-3, a demonstration that the derivatives clearing organization conducts stress tests of its liquidity resources in accordance with the standards and practices set forth in§ 39.36(c); d. Theoretical and empirical properties - Attach as Exhibit E-4, a demonstration that the derivatives clearing organization conducts an assessment of the theoretical and empirical properties of its margin model for all products it clears; e. Validation - Attach as Exhibit E-5, a demonstration that the derivatives clearing organization conducts on an annual basis, a full validation of its financial risk 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.034</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Attach, as Exhibit E, information and documents that demonstrate compliance with the risk management requirements set forth in§ 39.36 of the Connuission's regulations, including but not limited to: Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 22315 management model and its liquidity risk management model in accordance with the requirements set forth in§ 39.36(e); f. Custody and investment risk - Attach as Exhibit E-6, a demonstration that the custody and investment arrangements of the derivatives clearing organization's own funds and assets are subject to the same requirements as those specified in § 39.15 for the funds and assets of clearing members, and apply to the derivatives clearing organization's own funds and assets to the same extent as if such funds and assets belonged to clearing members; and g. Settlement banks - Attach as Exhibit E-7, a demonstration that the derivatives clearing organization, monitors, manages, and limits its credit and liquidity risks arising from its settlement banks; establishes and monitors adherence to strict criteria for its settlement banks that take account of, among other things, their regulation and supervision, creditworthiness. capitalization, access to liquidity, and operdtional reliability; and monitors and manages the concentration of credit and liquidity exposures to its settlement banks. EXHIBIT F- RECOVERY AND WIND-DOWN VerDate Sep<11>2014 a. Recoverv and wind-down plans - Attach as Exhibit F-1, a demonstration that the derivatives clearing organization has separate plans that set forth in detail: recovery or orderly wind-down, necessitated by uncovered credit losses or liquidity shortfalls, and recovery or orderly wind-down, necessitated by general business risk, operational risk, or any other risk that threatens the derivatives clearing organization's viability as a going concern. The demonstration shall also include how the plans comply with the requirements of §39.39(c). b. Financial resources to support recovery - Attach as Exhibit F-2, a narrative summary that demonstrates how the financial statements filed with the Commission pursuant to §§ 39.11 and 39.33 demonstrate that the derivatives clearing organization maintains sufficient unencumbered liquid financial assets, funded by the equity of its owners, to implement its recovery or wind-down plans. The narrative summary shall include a description of how the derivatives clearing organization complies with the requirements of§ 39.39(d). c. Additional financial resources - Attach as Exhibit F-3. a demonstration that the derivatives clearing organization maintains viable plans for raising additional financial resources as required under§ 39.39(e). 17:42 May 15, 2019 Jkt 247001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4725 E:\FR\FM\16MYP2.SGM 16MYP2 EP16MY19.035</GPH> khammond on DSKBBV9HB2PROD with PROPOSALS2 Attach, as Exhibit F, information and documents that demonstrate compliance with the recovery and wind-down requirements set forth in§ 39.39 of the Commission's regulations, including but not limited to: 22316 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules BILLING CODE 6351–01–C PART 140—ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION 33. The authority citation for part 140 continues to read as follows: ■ Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 16(b). 34. In § 140.94, revise paragraph (c) to read as follows: ■ § 140.94 Delegation of authority to the Director of the Division of Swap Dealer and Intermediary Oversight and the Director of the Division of Clearing and Risk. khammond on DSKBBV9HB2PROD with PROPOSALS2 * * * * * (c) The Commission hereby delegates, until such time as the Commission orders otherwise, the following function to the Director of the Division of Clearing and Risk and to such members of the Commission’s staff acting under his or her direction as he or she may designate from time to time: (1) The authority to review applications for registration as a derivatives clearing organization filed with the Commission under § 39.3(a)(1) of this chapter, to determine that an application is materially complete pursuant to § 39.3(a)(2) of this chapter, to request additional information in support of an application pursuant to § 39.3(a)(3) of this chapter, to extend the review period for an application pursuant to § 39.3(a)(6) of this chapter, to stay the running of the 180-day review period if an application is incomplete pursuant to § 39.3(b)(1) of this chapter, to review requests for amendments to orders of registration filed with the Commission under § 39.3(d)(1) of this chapter, to request additional information in support of a request for an amendment to an order of registration pursuant to § 39.3(d)(2) of this chapter, and to request additional information in support of a rule submission pursuant to § 39.3(g)(3) of this chapter; (2) All functions reserved to the Commission in § 39.4(a) of this chapter; (3) All functions reserved to the Commission in § 39.5(b)(2), (b)(3)(ix), (c)(1), and (d)(3) of this chapter; (4) All functions reserved to the Commission in § 39.10(c)(4)(iv) of this chapter; (5) All functions reserved to the Commission in § 39.11(b)(1)(v), (b)(2)(ii), (c)(1) and (3), and (f)(1), and (2) of this chapter; (6) All functions reserved to the Commission in § 39.12(a)(5)(iii) of this chapter; (7) All functions reserved to the Commission in § 39.13(g)(8)(ii), VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 (h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii), and (h)(5)(i)(C) of this chapter; (8) The authority to request additional information in support of a rule submission under §§ 39.13(i)(2) and 39.15(b)(2)(iii) of this chapter; (9) All functions reserved to the Commission in § 39.19(c)(2), (c)(3)(iv), and (c)(5) of this chapter; (10) All functions reserved to the Commission in § 39.20(a)(5) of this chapter; (11) All functions reserved to the Commission in § 39.21(c) of this chapter; (12) All functions reserved to the Commission in § 39.31 of this chapter; and (13) The authority to approve the requests described in §§ 39.34(d) and 39.39(f) of this chapter. * * * * * Issued in Washington, DC, on April 29, 2019, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Appendix 3—Statement of Commissioner Dan M. Berkovitz Introduction I support issuing for public comment the notice of proposed rulemaking (‘‘NPRM’’) to amend certain provisions of part 39 of the Commission’s regulations governing derivatives clearing organizations (‘‘DCOs’’). Part 39 generally covers registration and regulation of DCOs that centrally clear futures, options, and swaps regulated by the Commission. The NPRM includes a number of beneficial provisions. I commend the staff of the Division of Clearing and Risk for this important effort to clarify and clean up some issues in the rules and staff guidance that have accumulated since part 39 was substantively amended in 2011 and 2013. The NPRM also proposes several changes to the regulations that merit scrutiny as outlined below. I particularly look forward to comments on those provisions to help guide the Commission’s deliberations on the proposed amendments. Appendix 2—Statement of Chairman J. Christopher Giancarlo Background Central clearing of futures positions has been a fundamental risk mitigation measure for derivatives market participants in the United States for well over a hundred years. In more recent times, as futures and swap trading has grown dramatically,1 central clearing of derivatives including swaps has become a critical element in risk management of the financial system as a whole. In response to the 2008 financial crisis, world leaders at the G20 summit in Pittsburgh established central clearing for derivatives as a core objective in mitigating systemic risk.2 DCOs are a critical component of the clearing infrastructure, and effective clearinghouse registration and regulation is key to facilitating efficient, sound derivatives markets and preventing another financial crisis. As described in the NPRM, the Commission adopted regulations in 2011 and Swaps clearing is among the most sweeping and significant of the swaps reforms adopted by the Dodd-Frank Act. By any measure, the CFTC’s swaps clearing regime has been robust and highly successful. In 2011 and 2013, the Commission adopted regulations in part 39 to implement the Dodd-Frank Act’s Core Principles for Derivatives Clearing Organizations (DCOs). Since the adoption of these rules, Commission staff has worked with DCOs regarding questions concerning the interpretation and implementation of the regulations, and issued related staff relief or guidance. As part of Project KISS, the Commission is proposing to revise or delete certain provisions in part 39. These revisions will improve the clarity of the text, codify staff relief and guidance, and simplify processes for registration or reporting. There are also a few new requirements with respect to default procedures and reporting in response to more recent events, such as the launch of bitcoin futures contracts and the Nasdaq Clearing default. For these reasons, I support this proposal. 1 A CFTC study published in 1998 noted that an estimated 272 million futures and options contracts were traded globally in 1986, while recent Futures Industry Association data indicates that 30.28 billion futures and options contracts were traded globally in 2018. See CFTC, Division of Economic Analysis, The Global Competitiveness of U.S. Futures Markets Revisited (November 1999); available at https://www.cftc.gov/sites/default/files/ idc/groups/public/@swaps/documents/file/plstudy_ 53_cftc.pdf; FIA Releases Annual Trading Statistics showing Record [Exchange Traded Derivatives] Volume in 2018; available at https://fia.org/articles/ fia-releases-annual-trading-statistics-showingrecord-etd-volume-2018. Similarly, the trading of over-the-counter derivatives expanded from about $72 trillion in notional amount in 1998 to about $595 trillion in 2018. See Bank of International Settlements, OTC derivatives notional amount outstanding by risk category; available at https:// stats.bis.org/statx/srs/tseries/OTC_DERIV/H:A:A:A: 5J:A:5J:A:TO1:TO1:A:A:3:C?t=D5.1&p= 20172&x=DER_RISK.3.CL_MARKET_ RISK.T:B:D:A&o=w:19981.,s:line.nn,t: Derivatives%20risk%20category. 2 See G20, Leaders’ Statement: The Pittsburgh Summit (Sept. 24–25, 2009); available at https:// www.treasury.gov/resource-center/international/g7g20/Documents/pittsburgh_summit_leaders_ statement_250909.pdf. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Derivatives Clearing Organization General Provisions and Core Principles—Commission Voting Summary, Chairman’s Statement, and Commissioner’s Statement Appendix 1—Commission Voting Summary On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 E:\FR\FM\16MYP2.SGM 16MYP2 Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules 2013 to further implement DCO core principles and Title VIII of the Dodd-Frank Act. Based on experience in implementing these regulations and subsequent developments, including the establishment of international principles for clearing, the CFTC staff has provided guidance on the new regulations. It is now appropriate for the Commission to address this experience and these developments through amendments to our regulations. khammond on DSKBBV9HB2PROD with PROPOSALS2 Codification and Clarification The NPRM includes numerous amendments that clarify, further define, or provide more explicit direction to market participants. Governance requirements are more fully developed and applied across all DCOs. The NPRM adds new regulations 39.24, 39.25, and 39.26 that establish governance requirements for DCOs to better ensure that DCOs are well managed.3 These amendments provide greater certainty and uniform rules, and are important not only for fairness and consistency, but to improve risk management across the clearing space. The changes may help guard against risks from governance failures. While the new governance regulations are beneficial, many of the provisions set out only general principles and do not provide specific guidance or prescriptive standards. I look forward to public comment on whether more explicit guidance or requirements would be appropriate for any specific provisions. In particular, I look forward to comments on whether members should play a larger role in governance. Under the NPRM, regulation 39.16 would be amended to improve requirements around member default management.4 The recent member default at NASDAQ Clearing reinforces the importance of default management mechanisms and information sharing when a default occurs.5 The amendments explicitly require DCOs to have a default committee that must include clearing members. In addition, the amendments would require a DCO to include members in tests of the default management plan. I look forward to comments on how and when DCO members should be included in default management. In addition to the above, the NPRM would provide a number of more discrete improvements, such as an explicit requirement for initial margin to cover concentration risk; a requirement for DCO personnel to certify certain reports; and several new reporting requirements around settlement bank arrangements, depositories, and liquidity funding arrangements. Clarifying these types of issues will help maintain consistent, objective, and transparent oversight of registered DCOs. 3 See NPRM section IV.J. NPRM section IV.F. 5 See Luke Clancy, Margin or membership? Regulators react to Nasdaq default, Risk.net (Feb. 7, 2019) available at: https://www.risk.net/ regulation/6366441/margin-or-membershipregulators-react-to-nasdaq-default. 4 See VerDate Sep<11>2014 17:42 May 15, 2019 Jkt 247001 Issues Warranting Further Comment and Consideration The NPRM includes several proposed amendments that, while beneficial in some respects, may also present additional issues for the Commission to consider in developing the final rule. Comments in these areas would be particularly helpful to inform the Commission in its deliberations. Changes to regulation 39.13(g)(8) regarding calculation of initial margin and in particular, excess margin, attempt to incorporate in the regulation, and to clarify, staff guidance.6 Getting initial margin calculations right is critical to providing sufficient resources to cover variation margin shortfalls that may occur when resolving a member’s default. The proposed standard for margin to be ‘‘commensurate with the risk presented by each customer account,’’ as a principle, seems appropriate. However, little guidance is provided on how that principle should be applied or the appropriate parameters for consideration. Given the importance of initial margin calculations, I look forward to comments on whether the Commission should provide a more detailed standard in the regulation or further guidance on the calculation. New regulation 39.13(i) provides explicit procedures and requirements for filing DCO rules to implement a cross-margining program with other clearing organizations.7 From a general policy perspective, establishing explicit procedures in regulation for evaluating such arrangements would facilitate consistent, objective reviews by the Commission. However, multi-entity cross-margining— which could cross borders and involve multiple regulatory regimes of different regulators—creates additional layers of legal, operational, and financial risk that may be difficult to evaluate. The members of the DCO could be affected in ways not previously contemplated and that may be more obscure to the members and difficult for them to assess. The information that the DCO would be required to provide to the Commission under the NPRM is fashioned from less complex portfolio margining evaluation requirements and is general in nature. Will a bankruptcy involving a member of one of the clearing organizations, the DCO, or the other clearing organization affect the other entity and its members in ways that are not anticipated? Are there margin model risks, such as greater concentration risk across both entities, that are not properly accounted for in the proposed regulations? Do members of the DCO have other concerns and do they have appropriate mechanisms to voice those concerns through the DCO rules, governance structures, and/or CFTC review procedures? I look forward to reviewing the comments on these and other issues regarding the proposed multi-entity cross margining regulations. 6 See 7 See PO 00000 NPRM section IV.D.3.f. NPRM section IV.D.5. Frm 00093 Fmt 4701 Sfmt 9990 22317 Finally, the NPRM would establish regulation 40.5 as the mechanism for Commission review of certain DCO rule sets including: (1) A request to transfer a DCO’s open interest—in many cases its entire open interest, (2) cross-margining programs among different clearing organizations—including across borders and for entities subject to different regulators, and (3) commingling of futures, options, and swaps positions in a section 4d(a) futures account. These rule reviews could involve consideration of novel issues, customer protections, and other factors. Accordingly, I have some concern that regulation 40.5 may not provide sufficiently robust review procedures or the Commission with adequate authority to require a DCO to mitigate risks arising from the proposed actions. Section 40.5 was intended to address voluntary submission of DCO rule changes pursuant to section 5c(c) of the Commodity Exchange Act. While the process for submission and Commission review is more detailed under regulation 40.5 than under regulation 40.6, regulation 40.5 provides for automatic approval after 45 days if that period is not extended by the Commission and a narrow standard of review; namely, the Commission shall approve a DCO rule under review unless it ‘‘is inconsistent with the [Commodity Exchange] Act or Commission’s regulations.’’ However, the DCO activities to which this review procedure would be applied under the NPRM are significant actions that likely will raise customer protection concerns, entail a sophisticated risk management analysis, and call for a more nuanced review and response than can be accomplished under the blunt ‘‘inconsistent with the CEA’’ standard that governs the Commission under regulation 40.5. Accordingly, I encourage comments on whether regulation 40.5 is the appropriate mechanism to review these proposed DCO actions or whether a more balanced procedure should be employed that would provide the Commission more flexibility to ensure the proposed actions adequately address issues involving customer protection, potential risks to FCMs, and market integrity. Conclusion In conclusion, I commend the staff of the Division of Clearing and Risk for their efforts in preparing the NPRM to codify practices that are currently addressed through staff guidance and to conform our regulations to developments that have occurred since the regulations were issued. The NPRM will help clarify and provide explicit rules for clearing organizations that provide a vital service to derivatives markets. Finally, I look forward to the public comments on the NPRM, particularly on the proposed amendments discussed above. [FR Doc. 2019–09025 Filed 5–15–19; 8:45 am] BILLING CODE 6351–01–P E:\FR\FM\16MYP2.SGM 16MYP2

Agencies

[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Proposed Rules]
[Pages 22226-22317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09025]



[[Page 22225]]

Vol. 84

Thursday,

No. 95

May 16, 2019

Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 39, and 140





Derivatives Clearing Organization General Provisions and Core 
Principles; Proposed Rule

Federal Register / Vol. 84 , No. 95 / Thursday, May 16, 2019 / 
Proposed Rules

[[Page 22226]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 39, and 140

RIN 3038-AE66


Derivatives Clearing Organization General Provisions and Core 
Principles

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing amendments to certain regulations applicable to registered 
derivatives clearing organizations (DCOs). These proposed amendments 
would, among other things, address certain risk management and 
reporting obligations, clarify the meaning of certain provisions, 
simplify processes for registration and reporting, and codify existing 
staff relief and guidance. In addition, the Commission is proposing 
technical amendments to certain provisions, including certain 
delegation provisions, in other parts of its regulations.

DATES: Comments must be received by July 15, 2019.

ADDRESSES: You may submit comments, identified by ``Derivatives 
Clearing Organization General Provisions and Core Principles'' and RIN 
3038-AE66, by any of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (FOIA), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I (2018), and are accessible on the 
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance 
Analyst, 202-418-5467, [email protected]; Abigail S. Knauff, Special 
Counsel, 202-418-5123, [email protected]; Division of Clearing and Risk, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Project KISS
    B. Regulatory Framework for DCOs
II. Amendments to Part 1--General Regulations Under the Commodity 
Exchange Act
    A. Written Acknowledgment From Depositories--Sec.  1.20
    B. Governance and Conflicts of Interest--Sec. Sec.  1.59, 1.63, 
and 1.69
III. Amendments to Part 39--Subpart A--General Provisions Applicable 
to DCOs
    A. Definitions--Sec.  39.2
    B. Procedures for Registration--Sec.  39.3
    C. Procedures for Implementing DCO Rules and Clearing New 
Products
IV. Amendments to Part 39--Subpart B--Compliance With Core 
Principles
    A. Compliance With Core Principles--Sec.  39.10
    B. Financial Resources--Sec.  39.11
    C. Participant and Product Eligibility--Sec.  39.12
    D. Risk Management--Sec.  39.13
    E. Treatment of Funds--Sec.  39.15
    F. Default Rules and Procedures--Sec.  39.16
    G. Rule Enforcement--Sec.  39.17
    H. Reporting--Sec.  39.19
    I. Public Information--Sec.  39.21
    J. Governance Fitness Standards, Conflicts of Interest, and 
Composition of Governing Boards--Sec. Sec.  39.24, 39.25, and 39.26
    K. Legal Risk--Sec.  39.27
    L. Fully-Collateralized Positions
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs 
and DCOs That Elect To Be Subject to the Provisions
    A. Financial Resources for SIDCOs and Subpart C DCOs--Sec.  
39.33
    B. Risk Management for SIDCOs and Subpart C DCOs--Sec.  39.36
    C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec.  
39.37
    D. Corrections to Subpart C Regulations
VI. Amendments to Appendix A to Part 39--Form DCO
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
VIII. Amendments to Part 140--Organization, Functions, and 
Procedures of the Commission
IX. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. Project KISS

    The Commission is engaging in an agency-wide review of its rules, 
regulations, and practices to make them simpler, less burdensome, and 
less costly, and to make progress on G-20 regulatory reforms. This 
initiative is called Project KISS, which stands for ``Keep It Simple, 
Stupid.'' \2\ Consistent with these objectives, the Commission is 
proposing amendments to regulations applicable to DCOs to, among other 
things, enhance certain risk management and reporting obligations, 
clarify the meaning of certain provisions, simplify processes for 
registration and reporting, and codify existing relief and guidance.
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    \2\ See Remarks of Acting Chairman J. Christopher Giancarlo 
before the 42nd Annual International Futures Industry Conference in 
Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017, 
President Donald J. Trump issued Executive Order 13777: Enforcing 
the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs 
federal agencies, among other things, to designate a Regulatory 
Reform Officer and establish a Regulatory Reform Task Force. 
Although the CFTC, as an independent federal agency, is not bound by 
E.O. 13777, the Commission is nevertheless engaging in an agency-
wide review of its rules, regulations, and practices to make them 
simpler, less burdensome, and less costly. See Request for 
Information, 82 FR 23756 (May 24, 2017).
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B. Regulatory Framework for DCOs

    Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth 
core principles with which a DCO must comply in order to be registered 
and to maintain registration as a DCO (DCO Core Principles).\3\ In 
2011, the Commission adopted regulations in

[[Page 22227]]

subparts A and B of part 39 to implement the DCO Core Principles.\4\ In 
2013, the Commission adopted regulations in subpart C of part 39 \5\ to 
establish additional standards for compliance with the DCO Core 
Principles for those DCOs that have been designated as systemically 
important (SIDCOs) by the Financial Stability Oversight Council in 
accordance with Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act).\6\ The subpart C regulations 
are consistent with the Principles for Financial Market Infrastructures 
(PFMIs), published by the Committee on Payments and Market 
Infrastructures (CPMI) and the Technical Committee of the International 
Organization of Securities Commissions (IOSCO).\7\ Other DCOs may elect 
to opt-in to the subpart C requirements (subpart C DCOs) in order to 
achieve status as a qualifying central counterparty (QCCP).\8\
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    \3\ 7 U.S.C. 7a-1.
    \4\ See Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69334 (Nov. 8, 2011) (codified at 17 CFR part 
39); Customer Clearing Documentation, Timing of Acceptance for 
Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9, 
2012) (further amending Sec.  39.12).
    \5\ Derivatives Clearing Organizations and International 
Standards, 78 FR 72476 (Dec. 2, 2013).
    \6\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \7\ See CPMI-IOSCO, Principles for Financial Market 
Infrastructures (Apr. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
    \8\ In July 2012, the Basel Committee on Banking Supervision, 
the international body that sets standards for the regulation of 
banks, published the ``Capital Requirements for Bank Exposures to 
Central Counterparties'' (Basel CCP Capital Requirements), which 
describes standards for capital charges arising from bank exposures 
to central counterparties (CCPs) related to over-the-counter 
derivatives, exchange-traded derivatives, and securities financing 
transactions. The Basel CCP Capital Requirements create financial 
incentives for banks, including their subsidiaries and affiliates, 
to clear financial derivatives with CCPs that are prudentially 
supervised in a jurisdiction where the relevant regulator has 
adopted rules or regulations that are consistent with the standards 
set forth in the PFMIs. Specifically, the Basel CCP Capital 
Requirements introduce new capital charges based on counterparty 
risk for banks conducting financial derivatives transactions through 
a CCP. These incentives include (1) lower capital charges for 
exposures arising from derivatives cleared through a QCCP, and (2) 
significantly higher capital charges for exposures arising from 
derivatives cleared through non-qualifying CCPs. A QCCP is defined 
as an entity that (i) is licensed to operate as a CCP and is 
permitted by the appropriate regulator to operate as such, and (ii) 
is prudentially supervised in a jurisdiction where the relevant 
regulator has established and publicly indicated that it applies to 
the CCP, on an ongoing basis, domestic rules and regulations that 
are consistent with the PFMIs. The failure of a CCP to achieve QCCP 
status could result in significant costs to its bank customers.
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    Since the part 39 regulations were adopted, Commission staff has 
worked with DCOs to address questions regarding interpretation and 
implementation of the requirements established in the regulations. In 
light of this, the Commission believes it would be helpful to revise or 
clarify certain provisions of part 39 and to codify staff relief or 
guidance granted in the interim. The Commission is also proposing a few 
new requirements with respect to default procedures and event-specific 
reporting in response to recent events. The Commission believes these 
changes will provide greater clarity and transparency for DCOs and DCO 
applicants and lead to more effective DCO compliance and risk 
management generally.
    The Commission has carefully considered the costs and benefits 
associated with the proposed amendments, and invites commenters to 
provide data and analysis regarding any aspect of the proposed 
rulemaking. In addition to the amendments proposed herein, the 
Commission requests comment for any other aspects of part 39 that 
commenters believe the Commission should clarify or otherwise amend.

II. Amendments to Part 1--General Regulations Under the Commodity 
Exchange Act

A. Written Acknowledgment From Depositories--Sec.  1.20

    Regulation 1.20(d)(1) requires that a futures commission merchant 
(FCM) obtain a written acknowledgment from each depository with which 
the FCM deposits futures customer funds.\9\ The written acknowledgment 
must conform to a template letter set forth in appendix A to Sec.  
1.20, and the template letter includes certain requirements set forth 
in Sec.  1.20(d)(3) through (6). Regulation 1.20(d)(1) further 
provides, however, that an FCM is not required to obtain a written 
acknowledgment from a DCO that has adopted rules that provide for the 
segregation of customer funds in accordance with all relevant 
provisions of the CEA and the Commission's rules and orders thereunder. 
The Commission is proposing to amend Sec.  1.20(d) to clarify that the 
requirements listed in Sec.  1.20(d)(3) through (6) do not apply to a 
DCO, or to an FCM that clears through that DCO, if the DCO has adopted 
rules that provide for the segregation of customer funds. The proposed 
changes are not intended to be substantive, but rather to reflect the 
Commission's intent when Sec.  1.20 was last amended. Nonetheless, the 
Commission emphasizes that it has ample means of obtaining information 
regarding accounts held at a DCO under Sec.  1.20 by virtue of its 
ongoing oversight and supervision of DCOs. The Commission also is 
proposing to amend Sec.  1.20(d)(7) and (8) to explicitly account for 
FCMs that deposit customer funds with a DCO and thus are not required 
to obtain a written acknowledgment letter.
---------------------------------------------------------------------------

    \9\ Regulation 22.5 applies the written acknowledgment letter 
requirements of Sec.  1.20(d) to FCMs and DCOs in connection with 
the holding of cleared swaps customer collateral.
---------------------------------------------------------------------------

B. Governance and Conflicts of Interest--Sec. Sec.  1.59, 1.63, and 
1.69

    In the course of adopting the current part 39 regulations, the 
Commission removed and replaced Sec.  39.2,\10\ which had exempted DCOs 
from all Commission regulations except for those specified therein (the 
``Sec.  39.2 exemption''). The Commission noted that the Sec.  39.2 
exemption failed to account for regulations applicable to DCOs that 
were adopted later, such as Sec.  1.49.\11\ The Commission further 
noted that removal of the Sec.  39.2 exemption would subject DCOs only 
to Sec.  1.49 and three additional regulations: Sec. Sec.  1.59 
(activities of self-regulatory organization employees, governing board 
members, committee members, and consultants); 1.63 (service on self-
regulatory organization governing boards or committees by persons with 
disciplinary histories); and 1.69 (voting by interested members of 
self-regulatory organization governing boards and various 
committees).\12\ The Commission explained that these three provisions 
would be superseded by regulations the Commission had proposed to 
implement Core Principles O (Governance Arrangements), P (Conflicts of 
Interest), and Q (Composition of Governing Boards).\13\
---------------------------------------------------------------------------

    \10\ The current Sec.  39.2 sets forth definitions of terms used 
in part 39.
    \11\ See Risk Management Requirements for Derivatives Clearing 
Organizations, 76 FR 3698, 3714 (Jan. 20, 2011) (proposed rule).
    \12\ Id. at 3714 & n.77.
    \13\ See Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010) 
(proposed rule); Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011) (proposed rule).
---------------------------------------------------------------------------

    However, the Commission did not adopt those regulations, and 
Sec. Sec.  1.59, 1.63, and 1.69 became applicable to DCOs. The 
Commission is now proposing to adopt implementing regulations for Core 
Principles O, P, and Q by moving certain requirements from subpart C, 
which is applicable to only SIDCOs and subpart C DCOs, to subpart B, 
which is applicable to all registered

[[Page 22228]]

DCOs (discussed further below). Therefore, the Commission is proposing 
to restore DCOs' exemption from Sec. Sec.  1.59, 1.63, and 1.69 by 
removing ``clearing organization'' from the definition of ``self-
regulatory organization'' in each of those regulations. The Commission 
is also proposing to amend Sec.  1.64 to remove language that makes 
clear that the provision does not apply to DCOs. The amendments to the 
other provisions make that language no longer necessary.

III. Amendments to Part 39--Subpart A--General Provisions Applicable to 
DCOs

A. Definitions--Sec.  39.2

    Regulation 39.2 sets forth definitions applicable to terms used in 
part 39 of the Commission's regulations. Since Sec.  39.2 was adopted, 
the Commission has adopted definitions for some of the same terms that 
apply in other Commission regulations. Accordingly, the Commission is 
proposing amendments to Sec.  39.2 in order to maintain consistency 
with terms defined elsewhere in Commission regulations and to provide 
clarity with respect to the use of these terms.
1. Business Day
    Regulation 39.19(b)(3) defines ``business day,'' but because the 
definition is contained within Sec.  39.19, it is not clear that it is 
applicable to uses of the term ``business day'' elsewhere in part 39. 
The Commission is therefore proposing to remove Sec.  39.19(b)(3) and 
include the definition of ``business day'' in Sec.  39.2. The 
Commission also is proposing to clarify that the term ``Federal 
holidays'' in the ``business day'' definition refers to the schedule of 
U.S. federal holidays established under 5 U.S.C. 6103. The Commission 
is specifying this because some DCOs registered with the Commission are 
located outside the United States. Finally, the Commission is defining 
``foreign holiday'' as a day on which a DCO and its domestic financial 
markets are closed for a holiday that is not a Federal holiday in the 
United States, and adding the term to the list of exceptions to the 
definition of ``business day.'' The Commission believes there is no 
reason to require foreign DCOs to report on a non-trading day.
2. Customer
    Regulation 39.2 defines ``customer,'' for purposes of part 39, as a 
person trading in any commodity named in the definition of 
``commodity'' in section 1a(9) of the CEA or in Sec.  1.3 of the 
Commission's regulations, or in any swap as defined in section 1a(47) 
of the CEA or in Sec.  1.3. The definition further distinguishes a 
customer from the owner or holder of a house account.
    After Sec.  39.2 was adopted, the Commission amended the definition 
of ``customer'' in Sec.  1.3, to mean any person who uses a futures 
commission merchant, introducing broker, commodity trading advisor, or 
commodity pool operator as an agent in connection with trading in any 
commodity interest. The Commission also amended the definition of 
``commodity interest'' in Sec.  1.3 to include any swap as defined in 
the CEA, by the Commission, or jointly by the Commission and the 
Securities and Exchange Commission.
    Because the definition of ``customer'' in Sec.  1.3 now encompasses 
the definition in Sec.  39.2, the Commission believes that the 
definition in Sec.  39.2 is unnecessary and may create uncertainty. 
Therefore, the Commission is proposing to remove the definition of 
``customer'' in Sec.  39.2, leaving the definition in Sec.  1.3 as the 
applicable definition for purposes of part 39.
3. Customer Account or Customer Origin
    Regulation 39.2 defines ``customer account or customer origin'' as 
a clearing member account held on behalf of customers that is subject 
to section 4d(a) or section 4d(f) of the CEA. After Sec.  39.2 was 
adopted, the Commission adopted the definition of ``customer account'' 
in Sec.  1.3 to include both a futures account and a cleared swaps 
customer account, which are accounts subject to sections 4d(a) and 
4d(f) of the CEA, respectively.
    The Commission believes that having a definition of ``customer 
account or customer origin'' in Sec.  39.2 and a definition of 
``customer account'' in Sec.  1.3 may create uncertainty. Because the 
part 39 regulations use both ``customer account'' and ``customer 
origin'' terms, the Commission is proposing to amend the definition of 
``customer account or customer origin'' in Sec.  39.2 to cross-
reference the definition of ``customer account'' in Sec.  1.3, rather 
than removing the definition or the term ``customer origin.''
4. Enterprise Risk Management
    The Commission is proposing to define ``enterprise risk 
management'' because the term is used in proposed Sec.  39.10(d), which 
is discussed below.
5. Fully-Collateralized Position
    The Commission is proposing to define ``fully-collateralized 
position'' in conjunction with proposed exceptions from several part 39 
regulations for DCOs that clear fully-collateralized positions, as 
discussed below.
6. Key Personnel
    The Commission is proposing to add ``chief information security 
officer'' to the list of positions identified in the definition of 
``key personnel'' in Sec.  39.2. In the event of a cybersecurity 
incident, it is critical that Commission staff be able to quickly 
contact the person at each DCO responsible for responding to the 
incident to assess the DCO's response as well as to coordinate efforts 
among DCOs as necessary.

B. Procedures for Registration--Sec.  39.3

1. Application Procedures--Sec.  39.3(a)
    The Commission is proposing to make several changes to its 
procedures for registration as a DCO, set forth in Sec.  39.3. 
Regulation 39.3(a)(1) refers to ``[a]n organization desiring to be 
registered as a [DCO],'' while Sec.  39.3(a)(2) refers to ``[a]ny 
person seeking to register as a [DCO].'' To make the language 
consistent, the Commission is proposing to revise Sec.  39.3(a)(1) and 
(2) to refer to an ``entity seeking to register as a [DCO].'' The 
Commission is proposing additional changes to Sec.  39.3(a)(1) to 
improve the clarity of the text.
    Regulation 39.3(a)(2) requires an applicant for DCO registration to 
submit to the Commission a completed Form DCO, which is provided in 
appendix A to part 39.\14\ Since the adoption of Form DCO, the 
Commission has identified several areas in which changes to Form DCO 
are needed. Many of the revisions to the part 39 regulations proposed 
herein would require corresponding changes to Form DCO. Therefore, the 
Commission is proposing to revise Form DCO as discussed in Section VI. 
below.
---------------------------------------------------------------------------

    \14\ At the time Sec.  39.3(a)(2) was adopted, Form DCO was the 
only appendix to part 39. Since then, appendices have been added to 
part 39, and Form DCO is now set forth in appendix A. Therefore, the 
Commission is proposing to revise Sec.  39.3(a)(2) to reference 
``Form DCO . . . as provided in appendix A to this part.''
---------------------------------------------------------------------------

    Regulation 39.3(a)(3) provides that at any time during the 
application review process, the Commission may request that the DCO 
applicant submit supplemental information in order for the Commission 
to process the application. An applicant is required to ``file 
electronically'' such supplemental information with the Secretary of 
the Commission, in the format and manner specified by the Commission. 
The Commission is proposing to amend Sec.  39.3(a)(3) to require an 
applicant to ``provide'' such supplemental information and to delete 
the

[[Page 22229]]

requirement that it be filed with the Secretary of the Commission. By 
making these changes, yet retaining the requirement that the 
information be provided in the format and manner specified by the 
Commission, the Commission and DCO applicants would have greater 
flexibility. For example, the Commission would be able to permit an 
applicant to provide requested information through a presentation to 
Commission staff.
    Regulation 39.3(a)(5) provides for certain sections of a DCO 
application to be made public, including the ``first page of the Form 
DCO cover sheet.'' The regulation refers to Form DCO as it appears in 
the print edition of the Code of Federal Regulations. However, the 
Commission is aware that Form DCO may appear differently in other 
sources, so the Commission is proposing to amend Sec.  39.3(a)(5) to 
specify that the ``first page of the Form DCO cover sheet (up to and 
including the General Information section)'' will be made public. The 
Commission is also proposing to revise the provision to include 
specific references to the Form DCO exhibits that will be made public.
    Finally, the Commission is proposing to adopt new Sec.  39.3(a)(6), 
which would permit the Commission to extend the 180-day review period 
for DCO applications specified in Sec.  39.3(a)(1) for any period of 
time to which the applicant agrees in writing. This provision would be 
similar to Sec.  40.5(d)(2), which allows the Commission to extend the 
review period for rules submitted for Commission review and approval, 
if the registered entity that submitted the rule agrees in writing. The 
Commission believes it is important to have the ability to extend the 
review period for a DCO application so that, in the event that any 
issues or concerns arise that cannot be resolved in a timely manner, 
the Commission does not find itself in the position of having to deny 
the application.
2. Stay of Application Review--Sec.  39.3(b)
    Regulation 39.3(b)(2) provides for delegation to the Director of 
the Division, with the concurrence of the General Counsel, the 
authority to notify an applicant ``seeking designation under section 
6(a) of the [CEA]'' that the application is materially incomplete and 
the running of the 180-day period is stayed. By its terms, section 6(a) 
of the CEA applies only to designation of contract markets. However, 
under Sec.  39.3(a), the Commission applies the same procedures to DCO 
applications. Because DCOs are ``registered'' and not ``designated,'' 
the Commission is substituting ``registration'' for ``designation'' in 
Sec.  39.3(b)(2).
3. Amendment of an Order of Registration--Sec.  39.3(a)(2)
    Regulation 39.3(a)(2) specifies that any person seeking to register 
as a DCO, any applicant amending its pending application, and any 
registered DCO seeking to amend its order of registration must submit 
to the Commission a completed Form DCO, which must include a cover 
sheet, all applicable exhibits, and any supplemental materials, 
including amendments thereto, as provided in appendix A to part 39. The 
Form DCO instructions correspond to this requirement and currently 
specify that requests for amending a registration order and any 
associated exhibits must be submitted via Form DCO.
    The Commission is proposing to change the requirements regarding a 
DCO's request to amend an order of registration. First, the Commission 
proposes to amend Sec.  39.3(a)(2) and Form DCO to eliminate the 
required use of Form DCO to request an amended order of registration 
from the Commission. Under current practice, a DCO is permitted to file 
a request for an amended order with the Commission rather than 
submitting Form DCO. Commission staff typically will review the 
request, obtain additional information from the DCO where necessary, 
and subsequently recommend to the Commission whether to grant or deny 
the amended order. Given current practice, the Commission believes that 
an updated Form DCO is not needed to request an amended order of 
registration. Second, the Commission proposes to amend Sec.  39.3(a)(4) 
to state that an applicant only needs to file amended exhibits and 
other information when filing a Form DCO to update a pending 
application.
    Consistent with existing Commission practice and the proposal to 
eliminate the use of Form DCO to request an amended registration order, 
the Commission is proposing new Sec.  39.3(d) to establish a separate 
process for such requests. A DCO would be required to provide the 
Commission with any additional information and documentation necessary 
to review a request to amend an order of registration. The Commission 
would issue an amended order if the Commission determines that the DCO 
would continue to maintain compliance with the Act and the Commission's 
regulations after such an amendment. Further, the Commission may also 
issue an amended order of registration subject to conditions. The 
Commission also proposes to specify that it may decline to issue an 
amended order based upon a determination that the DCO would not 
continue to maintain compliance with the Act and the Commission's 
regulations upon such amendment.
4. Dormant Registration--Sec.  39.3(d)
    Regulation 39.3(d) establishes the procedure for a dormant DCO to 
reinstate its registration before it can begin ``listing or relisting'' 
products for clearing. The Commission is proposing to replace ``listing 
or relisting'' with ``accepting'' to more accurately describe a DCO's 
activities. The Commission also proposes to renumber Sec.  39.3(d) as 
Sec.  39.3(e).
5. Vacation of Registration--Sec.  39.3(e)
    Section 7 of the CEA and Sec.  39.3(e) of the Commission's 
regulations permit a DCO to request that the Commission vacate its 
registration. Orders of vacation of registration issued by the 
Commission have included requirements based on section 7 of the CEA and 
other Commission regulations that are not specifically listed in Sec.  
39.3(e). The Commission is proposing to amend Sec.  39.3(e) to codify 
these requirements and provide greater transparency to any DCO that is 
considering vacating its registration. To implement the proposed 
changes, the Commission is proposing to renumber current Sec.  39.3(e) 
as Sec.  39.3(f)(1).
    Section 7 of the CEA requires any registered entity that wishes to 
have its registration vacated to make a written request to the 
Commission. Section 7 also requires that the request be made at least 
90 days prior to the date on which the registered entity wants the 
vacation to take effect. The Commission is proposing to adopt Sec.  
39.3(f)(1)(i) to specifically require a DCO to state in its request the 
date it wishes to have its registration vacated and to make the request 
at least 90 days prior to that date.
    The Commission is also proposing to adopt Sec.  39.3(f)(1)(ii) to 
require a DCO to state in its request how it intends to transfer or 
otherwise unwind all open positions at the DCO. Under the proposed 
rule, any actions to transfer or unwind positions would be required to 
reflect the interests of affected clearing members and their customers. 
The Commission believes this requirement will help ensure that a DCO 
that plans to voluntarily cease its clearing activity will do so with 
minimal disruptions to its members and the markets it serves.
    The Commission is proposing to adopt Sec.  39.3(f)(1)(iii) and (iv) 
to require a DCO to continue to maintain its books and records after 
its registration has

[[Page 22230]]

been vacated for the requisite statutory and regulatory retention 
periods, and to require a DCO to make all such books and records 
available for inspection by any representative of the Commission or the 
United States Department of Justice after its registration has been 
vacated, as set forth in Sec.  1.31 of the Commission's regulations. 
The Commission has included this requirement in previous orders of 
vacation based on Sec.  39.3(f), which states that a vacation of 
registration ``shall not affect any action taken or to be taken by the 
Commission based upon actions, activities or events occurring during 
the time that the entity was registered with the Commission.'' \15\ The 
Commission is proposing this requirement to further ensure that a DCO 
does not destroy its books and records in order to hinder or avoid 
Commission action following the vacation of its registration.
---------------------------------------------------------------------------

    \15\ To accommodate the proposed changes, the Commission is 
proposing to include this sentence as part of Sec.  39.3(f)(1).
---------------------------------------------------------------------------

    Finally, section 7 of the CEA requires the Commission to 
``forthwith send a copy'' of the notice that was filed with the 
Commission requesting vacation and the order of vacation to all other 
registered entities. The Commission is proposing to adopt Sec.  
39.3(f)(2) to specify that this requirement will be met by posting the 
required documents on the Commission's website. This provision was 
written and amended before the internet expanded to its current form 
and level of access.\16\ The Commission believes that posting the 
required documents on its website is the most effective and efficient 
way of providing the required information to all registered entities, 
as well as the public.
---------------------------------------------------------------------------

    \16\ The requirement to send a copy of the notice and order was 
first included in section 7 in 1922. The Grain Futures Act, Public 
Law 67-331 ch. 369, sec. 7, 42 Stat. 1002 (1922). Section 7 was most 
recently amended in 2000, to cover all types of registered entities, 
including DCOs. Commodity Futures Modernization Act of 2000, Public 
Law 106-554, Title I, sec. 123(a)(17), 114 Stat. 2763 (2000).
---------------------------------------------------------------------------

6. Request for Transfer of Registration and Open Interest--Sec.  
39.3(f)
    Regulation 39.3(f) establishes procedures that a DCO must follow to 
request the transfer of its DCO registration and positions comprising 
open interest for clearing and settlement, in anticipation of a 
corporate change. Regulation 39.3(f) also pertains to instances in 
which a corporate change results in the transfer of all or 
substantially all of a DCO's assets to another legal entity.
    Commission staff has found that the requirements of Sec.  39.3(f) 
have created confusion for DCOs which merely want to convert the DCO 
from one type of legal entity to another or change the place of 
domicile for the DCO's legal entity without changing the DCO's 
operations or transferring the DCO's registration to new ownership. The 
Commission also recognizes that a transfer of open interest would not 
necessarily be tied to a corporate change.\17\ For example, a DCO may 
wish to transfer open interest to another DCO that is also a subsidiary 
of the same parent company, or to another DCO in connection with 
ceasing its clearing services for a particular product.
---------------------------------------------------------------------------

    \17\ The Commission notes, however, that a transfer of open 
interest in this regard would not be in the context of a default, 
which would typically involve a DCO transferring positions from one 
FCM to another FCM.
---------------------------------------------------------------------------

    To separate the procedures for a request to transfer open interest 
from those procedures to report a change to the DCO's corporate 
structure or ownership, the Commission is proposing changes to Sec.  
39.3(f), to be renumbered as Sec.  39.3(g), to simplify the 
requirements for requesting a transfer of open interest and remove 
references to transfers of registration and requirements regarding 
corporate changes. Proposed Sec.  39.3(g) would only apply to instances 
in which a DCO requests to transfer its open interest. Changes to the 
DCO's ownership would continue to be addressed under Sec.  
39.19(c)(4)(viii) (proposed to be renumbered as Sec.  39.19(c)(4)(ix)). 
Additionally, as discussed further below, the Commission is proposing 
to require a DCO to report a change to the legal name under which it 
operates in proposed Sec.  39.19(c)(4)(xi). The Commission is also 
proposing conforming changes to Sec.  39.19(c)(4)(ix) to remove cross-
references to Sec.  39.3(f).
    Under the proposed amendments to Sec.  39.3(g), a DCO seeking to 
transfer its open interest would be required to submit rules for 
Commission approval pursuant to Sec.  40.5,\18\ rather than submitting 
a request for an order at least three months prior to the anticipated 
transfer. In an effort to simplify the existing requirements, the 
proposed change would permit the transfer to take effect after a 45-day 
Commission review period. The 45-day review period would be intended to 
ensure that clearing members are made aware of the intended transfer 
and to determine whether the transferee DCO is suitable to take on the 
transfer \19\ and would be able to continue to operate in compliance 
with the CEA and the Commission's regulations. As part of its 
submission pursuant to Sec.  40.5, the DCO would be required to 
include: (1) The underlying agreement that governs the transfer; (2) a 
description of the transfer, including the reason for the transfer and 
its impact on the rights and obligations of clearing members and market 
participants holding positions that comprise the DCO's open interest; 
(3) a discussion of the transferee's ability to comply with the CEA, 
including the DCO Core Principles, and the Commission's regulations 
thereunder; (4) the transferee's rules marked to show changes that 
would result from acceptance of the transferred positions; (5) a list 
of products for which the DCO requests transfer of open interest; and 
(6) a representation by the transferee that it is in and will maintain 
compliance with the CEA, including the DCO Core Principles, and the 
Commission's regulations thereunder upon transfer of the open interest.
---------------------------------------------------------------------------

    \18\ SIDCOs should consider whether the facts and circumstances 
of the approval sought pursuant to a Sec.  40.5 filing also obligate 
a SIDCO to file a Sec.  40.10 submission.
    \19\ The Commission notes that, under the existing framework, 
positions cleared for U.S. customers must be cleared by a registered 
DCO, while proprietary positions of U.S. persons may be cleared by 
registered or exempt DCOs. As a result, the Commission would need to 
ensure that the positions are transferred to an entity that is 
appropriately registered or exempt from DCO registration.
---------------------------------------------------------------------------

C. Procedures for Implementing DCO Rules and Clearing New Products

1. Request for Approval of Rules--Sec.  39.4(a)
    Regulation 39.4(a) specifies that an applicant for registration or 
a registered DCO may request, pursuant to the procedures set forth in 
Sec.  40.5, that the Commission approve any or all of its rules prior 
to their implementation. In practice, the Commission's review of 
applications for DCO registration includes review of the applicant's 
rules, which are required to be submitted as Exhibit A-2 to Form DCO. 
The Commission's issuance of an order of registration as a DCO 
constitutes an approval of the applicant's rules that were submitted as 
part of the application. Accordingly, the Commission is proposing to 
delete the reference in Sec.  39.4(a) to an applicant for registration, 
as it is unnecessary for an applicant to separately request approval of 
its rules.
2. Portfolio Margining--Sec.  39.4(e)
    Regulation 39.4(e) establishes certain procedural requirements that 
apply to a DCO seeking approval for a futures account portfolio 
margining program. Under Sec.  39.4(e), a DCO seeking to provide a 
portfolio margining program under which securities would be held in

[[Page 22231]]

a futures account is required to petition the Commission for an order 
``under section 4d of the [CEA].'' To conform terminology to other 
provisions in part 39 which distinguish between futures accounts 
subject to section 4d(a) of the CEA and cleared swaps accounts subject 
to section 4d(f) of the CEA, the Commission is proposing to substitute 
``section 4d(a)'' for ``section 4d'' in Sec.  39.4(e).

IV. Amendments to Part 39--Subpart B--Compliance With Core Principles

A. Compliance With Core Principles--Sec.  39.10

1. Chief Compliance Officer--Sec.  39.10(c)
    Regulation 39.10(c)(1)(ii) requires that a DCO's chief compliance 
officer (CCO) report to the board of directors or the senior officer of 
the DCO. The Commission recognizes that a legal entity registered as a 
DCO may engage in substantial activities not related to clearing, in 
which case it may be more appropriate for the CCO to report to the 
senior officer responsible for the DCO's clearing activities. For 
example, traditionally, exchanges have had clearing operations as a 
component of their overall structure. In some instances, the exchange 
is the same legal entity as the DCO, and therefore, the senior officer 
of the entity would not necessarily be focused on the clearing 
operations. In light of this, the Commission is proposing to amend 
Sec.  39.10(c)(1)(ii) to permit the CCO to report to the senior officer 
responsible for the DCO's clearing activities. The Commission also is 
proposing to amend Sec.  39.10(c)(4)(i) to permit the CCO to submit the 
annual report (which is discussed below) to the senior officer 
responsible for the DCO's clearing activities.\20\
---------------------------------------------------------------------------

    \20\ Regulation 39.10(c)(3) also requires the CCO to ``provide 
the annual report to the board of directors or the senior officer.'' 
Because this requirement is set forth in greater detail in Sec.  
39.10(c)(4)(i), the Commission is proposing to remove, rather than 
amend, the language in Sec.  39.10(c)(3).
---------------------------------------------------------------------------

    Regulation 39.10(c)(3)(i) requires the CCO to prepare an annual 
report that contains a description of the DCO's written policies and 
procedures, including the code of ethics and conflict of interest 
policies. The Commission is proposing to amend this requirement to 
allow a DCO to incorporate by reference the parts of its most recent 
CCO annual report containing such description, to the extent that the 
DCO's written policies and procedures have not materially changed since 
they were most recently described in a previously submitted CCO annual 
report. This is intended to help make the process of preparing the CCO 
annual report more efficient by not requiring the report to repeat 
potentially lengthy descriptions of policies and procedures that have 
already been described in a CCO annual report previously submitted to 
the Commission. However, to ensure that the descriptions remain current 
and easily accessible, the Commission is proposing to allow this 
incorporation by reference only to a CCO annual report submitted to the 
Commission within the five-year period prior to the date of the CCO 
annual report containing such incorporation by reference. The 
Commission believes that this timeframe is appropriate given the record 
retention requirements of Sec.  39.20. The Commission wishes to stress 
that this ability to incorporate by reference only applies to 
descriptions of policies and procedures that have not materially 
changed and does not apply to the CCO's assessment of their 
effectiveness or other requirements outside of Sec.  39.10(c)(3)(i).
    The Commission also is proposing to amend Sec.  39.10(c)(3)(ii)(A), 
which requires the CCO to prepare an annual report that reviews each 
``core principle and applicable Commission regulation,'' and with 
respect to each, identifies the compliance policies and procedures that 
are designed to ensure compliance ``with the core principle.'' In order 
to be consistent with the first part of the requirement, the Commission 
is proposing to change the language of the second part to ``with each 
core principle and applicable regulation.'' The Commission is further 
proposing to amend Sec.  39.10(c)(3)(ii) to clarify that, for SIDCOs 
and subpart C DCOs, this includes the Commission's regulations in 
subpart C of part 39. In addition, the Commission is further proposing 
to require that the compliance policies and procedures be identified 
``by name, rule number, or other identifier'' to clarify that this 
provision is intended to require the CCO annual report to clearly and 
specifically identify the policies and procedures intended to comply 
with each core principle and applicable regulation.
    Finally, Sec.  39.10(c)(4)(i) requires the CCO to provide the 
annual report to the board of directors or senior officer of the DCO 
for review prior to submitting it to the Commission. The Commission is 
proposing to amend the provision to require that this process be 
described in the annual report, including providing the date on which 
the report was submitted to the board of directors or senior officer. 
The Commission notes that Sec.  39.10(c)(4)(i) already requires the 
submission of the report to the board of directors or senior officer to 
be recorded in the board of directors' meeting minutes or otherwise, as 
evidence of compliance with this requirement. However, the Commission 
believes that it is reasonable to require similar disclosure in the CCO 
annual report so that compliance is evident outside the context of an 
examination of the DCO's board of directors' meeting minutes or other 
records. The Commission notes that some DCOs already describe this 
process in the cover letter submitted along with the CCO annual report, 
but the Commission prefers that this description appear in the annual 
report itself or in an annex, schedule, or exhibit attached to and 
included with the annual report. The Commission is also proposing to 
amend Sec.  39.10(c)(4)(ii) by removing the requirement that the CCO 
annual report be submitted concurrently with the DCO's fiscal year-end 
audited financial statement, to be consistent with a proposed change to 
Sec.  39.19(c)(3)(iv) described below.
2. Enterprise Risk Management--Sec.  39.10(d)
    The Commission is proposing to add new Sec.  39.10(d) \21\ to 
specifically provide that a DCO is required to have a program of 
enterprise risk management, which would be defined in Sec.  39.2 as an 
enterprise-wide strategic business process intended to identify 
potential events that may affect the enterprise and to manage the 
probability or impact of those events on the enterprise as a whole, 
such that the overall risk remains within the enterprise's risk 
appetite and provides reasonable assurance that the DCO can continue to 
achieve its objectives, including compliance with the CEA and

[[Page 22232]]

Commission regulations. The proposed definition is intended to be 
applicable to a variety of corporate structures, including stand-alone 
DCOs, legal entities that are a DCO but also perform other functions 
(such as a DCM), and corporate groups that consist of a DCO and legally 
separate but affiliated entities.\22\
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    \21\ The Commission is proposing to place the requirement for an 
enterprise risk management program in Sec.  39.10, which codifies 
Core Principle A (pertaining to compliance with the DCO Core 
Principles generally), to emphasize the broad application of an 
enterprise risk management program to a DCO's operations and 
services. The Commission previously declined to adopt an enterprise 
risk management requirement applicable to DCOs in a rulemaking 
pertaining to a specific Core Principle--Core Principle I, ``System 
Safeguards''--because such a requirement ``must be addressed in a 
more comprehensive fashion involving more than the system safeguards 
context alone, and thus are not appropriate for this rulemaking.'' 
See System Safeguards Testing Requirements for Derivatives Clearing 
Organizations, 81 FR 64322, 64332 (Sept. 19, 2016). Other Commission 
regulations codify various specific aspects of risk management. For 
example, Sec.  39.13 codifies Core Principle D, which focuses on 
market risk and credit risk; Sec.  39.18 codifies Core Principle I, 
which addresses system safeguards; and Sec.  39.27 codifies Core 
Principle R, which addresses legal risk. By including the enterprise 
risk management requirement in Sec.  39.10, the Commission intends 
to underscore that a properly designed and managed enterprise risk 
management program covers all risks.
    \22\ The term ``enterprise-wide'' is intended to require that 
the process of identifying, assessing, measuring, monitoring, and 
managing risk apply to the entire legal entity and its affiliates as 
a collective whole, with the objective to manage the risks to the 
DCO. A DCO would satisfy its obligations under paragraph (d)(1) (and 
paragraphs (d)(2) and (3), as discussed below) if it is part of a 
corporate group that has in place an enterprise risk management 
program that includes the DCO within its scope and complies with the 
requirements of this section.
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    An enterprise risk management program requires an entity to assess 
all potential risks it faces, including but not limited to systemic, 
cyber, legal, credit, liquidity, concentration, general business, 
operational, custody and investment, conduct, financial, reporting, 
compliance, governance, strategic, and reputational risks. An 
enterprise risk management program also requires the entity to identify 
and assess those risks on an enterprise-wide basis, meaning that it 
must consider whether individual risks across the organization and its 
affiliates are interrelated and may create a combined exposure to the 
entity that differs from the sum of the individual risks, and must 
measure, monitor, and manage such risks accordingly. Additionally, an 
enterprise risk management program requires an assessment of both the 
nominal or inherent risk that exists prior to the establishment of any 
risk mitigation activities (i.e., controls) as well as the residual 
risk that remains once such mitigation activities or risk responses are 
taken into account.
    Existing Commission regulations already require a DCO to manage its 
risks.\23\ However, the Commission has found that some DCOs lack a 
formal enterprise risk management program that addresses their risks on 
an enterprise-wide basis. Therefore, proposed Sec.  39.10(d)(1) and (2) 
would require a DCO to implement an enterprise risk management program 
and establish and maintain an enterprise risk management framework.
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    \23\ For example, Sec.  39.11(a) requires a DCO to identify and 
adequately manage its general business risks; Sec.  39.13(a) 
requires a DCO to ensure that it possesses the ability to manage the 
risks associated with discharging the responsibilities of the DCO 
through the use of appropriate tools and procedures; and Sec.  
39.13(b) requires a DCO to establish and maintain written policies, 
procedures, and controls which establish an appropriate risk 
management framework that, at a minimum, clearly identifies and 
documents the range of risks to which the DCO is exposed and 
addresses the monitoring and management of the entirety of those 
risks.
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    Consistent with Sec.  39.10(b), the Commission does not intend to 
be overly prescriptive by requiring specific standards and 
methodologies. A DCO should develop an enterprise risk management 
program that works best for its specific risk exposures, product types, 
customer base, market segment, and organizational structure, among 
other things, as long as the program meets the proposed minimum 
standards and any other legal and regulatory requirements.
    Therefore, proposed Sec.  39.10(d)(3) would require a DCO to follow 
generally accepted standards and industry best practices with respect 
to the development and ongoing monitoring of its enterprise risk 
management framework, assessment of the performance of the enterprise 
risk management program, and the management and mitigation of risk to 
the DCO. The Commission is mindful that best practices evolve and 
change over time and does not, therefore, wish to prescribe specific 
standards in its regulations.\24\
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    \24\ In the interests of offering guidance to DCOs, however, the 
Commission notes that standards similar to those developed by the 
Committee of Sponsoring Organizations of the Treadway Commission or 
the International Organization for Standardization are currently 
among those that would reasonably be considered in the development 
of an enterprise risk management program. Although different 
standards may use different terminology for the same concept, these 
standards have some commonalities, such as the statement of risk 
appetite and the use of a risk register or logs to record any losses 
or risks above a given threshold. These standards are noted here to 
assist DCOs in identifying standards that they may wish to adopt or 
consider in designing and implementing their risk management 
frameworks; there may be other internationally-recognized standards 
that may be used in addition to or instead of the standards 
mentioned above. In the interests of transparency, a DCO should 
specify the standards or industry best practices it uses as part of 
its enterprise risk management program.
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    The Commission has observed that some DCOs tend to ``silo'' 
responsibility for complying with their statutory and regulatory 
obligations given the diverse nature of the relevant risks. For 
example, risk management personnel might be primarily responsible for 
compliance with Core Principle D, while information technology 
personnel might be primarily responsible for managing the risks 
addressed by Core Principle I. To ensure that the enterprise risk 
management program is managed appropriately, the Commission is 
proposing Sec.  39.10(d)(4), which would require a DCO to identify as 
its enterprise risk officer an appropriate individual that exercises 
the full responsibility and authority to manage the DCO's enterprise 
risk management function.\25\
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    \25\ The Commission is proposing to require that the DCO 
``identify,'' rather than ``designate,'' the enterprise risk officer 
because, for certain corporate structures, the enterprise risk 
officer would most appropriately be an officer of a parent or other 
affiliate of the DCO. As a result, the DCO may not always be the 
entity that may properly ``designate'' the enterprise risk officer.
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    The enterprise risk officer would be required to have the 
authority, independence, resources, expertise, and access to relevant 
information necessary to fulfil the responsibilities of such position. 
The Commission believes that the independence of the enterprise risk 
officer is a critical factor in allowing such officer to operate 
effectively and has concerns about the potential for senior officers to 
interfere with the enterprise risk officer's performance of his or her 
responsibilities. The Commission requests comment regarding whether the 
enterprise risk officer should be required to report directly to the 
board of directors of the organization for which the enterprise risk 
officer is responsible for managing the risks, whether such 
organization is the DCO or its corporate parent or other affiliate. The 
Commission also requests comment as to whether a DCO's chief risk 
officer should be permitted to also serve as its enterprise risk 
officer.

B. Financial Resources--Sec.  39.11

    Regulation 39.11 implements Core Principle B, which requires a DCO 
to possess financial resources that, at a minimum, exceed the total 
amount that would enable the DCO to meet its financial obligations to 
its clearing members notwithstanding a default by the clearing member 
creating the largest financial exposure for the DCO in extreme but 
plausible market conditions and to cover its operating costs for a 
period of one year, as calculated on a rolling basis. The Commission is 
proposing to revise or clarify several aspects of Sec.  39.11, 
including revising the language of Sec.  39.11(a) to make it more 
consistent with Core Principle B.
1. Calculation of Largest Financial Exposure and Stress Tests--Sec.  
39.11(a)(1), (c)(1) and (2).
    Regulation 39.11(a)(1) requires a DCO to maintain financial 
resources sufficient to meet its financial obligations to its clearing 
members notwithstanding a default by the clearing member creating the 
largest financial exposure for the DCO in extreme but plausible market 
conditions. Regulation 39.11(c)(1) requires a DCO to perform ``stress 
testing'' in order to determine the

[[Page 22233]]

financial resources required to satisfy Sec.  39.11(a)(1). As an 
initial matter, the Commission is proposing to change the wording to 
``stress tests'' to use the term defined in Sec.  39.2. This is not 
intended to change the meaning of Sec.  39.11(c)(1).
    Although Sec.  39.11(c)(1) grants a DCO reasonable discretion in 
determining the methodology used to calculate its financial resources 
requirement, Commission staff has noted inconsistencies in how DCOs 
treat excess collateral on deposit when conducting stress tests. These 
inconsistencies lessen the usefulness of the stress tests. Accordingly, 
the Commission is proposing additional minimum requirements that a DCO 
would have to follow in determining its exposure in accordance with 
Sec.  39.11(c)(1).
    In particular, the Commission is proposing to add Sec.  
39.11(c)(2)(i)(A) \26\ to require a DCO to calculate its largest 
financial exposure net of the clearing member's required initial margin 
amount on deposit. In other words, the DCO may not take into account 
excess collateral on deposit or initial margin required but not yet 
received. This would focus a DCO's analysis on the resources that would 
actually be available to the DCO during times of stress and is 
consistent with recent guidance issued by CPMI-IOSCO suggesting that 
when assessing the adequacy of their financial resources, CCPs should 
take into account only prefunded financial resources and ignore 
voluntary excess contributions.\27\ Consistent with this change, the 
Commission is proposing to remove Sec.  39.11(b)(1)(i), which permits 
margin to be used to satisfy the requirements of Sec.  39.11(a)(1), 
because the required initial margin amount on deposit for the clearing 
member will be applied before determining the largest financial 
exposure for the DCO in extreme but plausible market conditions. 
Therefore, the margin would not be available to also cover the 
exposure.
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    \26\ The Commission is proposing to renumber current Sec.  
39.11(c)(2) as Sec.  39.11(c)(3).
    \27\ See CPMI-IOSCO, Resilience of central counterparties: 
Further guidance on the PFMI (July 2017), Principles 4.2.4, 4.2.5, 
available at https://www.bis.org/cpmi/publ/d163.pdf.
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    Additionally, the Commission is proposing Sec.  39.11(c)(2)(ii) to 
require that when stress tests produce losses in both customer and 
house accounts, a DCO must combine the customer and house stress test 
losses of each clearing member using the same stress test scenario.
    Finally, the Commission is proposing several provisions designed to 
ensure customer funds are treated properly when a DCO is calculating 
its largest financial exposure. Proposed Sec.  39.11(c)(2)(i)(B) would 
require a DCO to use customer initial margin only to the extent 
permitted by parts 1 and 22 of the Commission's regulations. Proposed 
Sec.  39.11(c)(2)(iii) would clarify that when calculating its largest 
financial exposure, a DCO may net any gains in the house account with 
customer losses, if permitted by the DCO's rules; however, a DCO may 
not net losses in the house account with gains in the customer account. 
Proposed Sec.  39.11(c)(2)(iv) would further clarify that, with respect 
to a clearing member's cleared swaps customer account, a DCO may net 
gains for one customer against losses for another customer only to the 
extent permitted by the DCO's rules.
2. Assessments--Sec.  39.11(d)(2)
    Regulation 39.11(d)(2) sets out certain conditions that apply to a 
DCO's use of assessments for additional guaranty fund contributions in 
calculating the financial resources available to meet its obligations 
under Sec.  39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that the 
DCO shall only count the value of assessments, after a 30 percent 
haircut, ``to meet up to 20 percent of those obligations.'' The 
Commission has been advised that the phrase ``those obligations,'' 
which is a reference to the obligations discussed in the introductory 
language of Sec.  39.11(d)(2), has created some uncertainty. Therefore, 
for clarity, the Commission is proposing to replace the phrase ``those 
obligations'' with ``the total amount required under paragraph (a)(1) 
of this section.''
3. Liquidity of Financial Resources--Sec.  39.11(e)
    Regulation 39.11(e)(1)(ii) requires that the financial resources 
allocated by a DCO to meet the requirements of Sec.  39.11(a)(1) (i.e., 
its default resources) be sufficiently liquid to enable the DCO to 
fulfill its obligations as a central counterparty during a one-day 
settlement cycle. Regulation 39.11(e)(1)(ii) further requires that 
those resources include cash, U.S. Treasury obligations, or high 
quality, liquid, general obligations of a sovereign nation (i.e., cash 
or cash equivalents), in an amount greater than or equal to the average 
of its clearing members' average pays over the last fiscal quarter.\28\ 
If that amount is less than what a DCO needs to fulfill its obligations 
during a one-day settlement cycle, Sec.  39.11(e)(1)(iii) permits a DCO 
to take into account a committed line of credit for the purpose of 
meeting the remainder of the requirement.
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    \28\ The Commission wishes to clarify that the cash, U.S. 
Treasury obligations, or high quality, liquid, general obligations 
of a sovereign nation required to be held under Sec.  
39.11(e)(1)(ii) do not have to be attributable to the DCO's own 
capital but can be attributable to any of the acceptable financial 
resources included in Sec.  39.11(a)(1).
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    The Commission's intention was to require that at least a portion 
of a DCO's default resources be sufficiently liquid to enable the DCO 
to complete a one-day settlement cycle and that these liquid resources 
include a certain amount of cash or cash equivalents. Then, if the cash 
or cash-equivalent amount was not sufficient to meet the total one-day 
settlement cycle liquidity requirement, a DCO could use a committed 
line of credit to make up the difference.\29\ Regulation 39.11(b)(1), 
however, which sets forth the types of financial resources that can be 
considered as default resources, does not expressly permit the use of a 
committed line of credit; \30\ it does permit the use of ``[a]ny other 
financial resource deemed acceptable by the Commission.'' The result is 
that Sec.  39.11(b)(1) only permits a DCO to use a committed line of 
credit as part of its default resources if ``deemed acceptable by the 
Commission,'' while Sec.  39.11(e)(1)(iii) seems to permit a DCO to use 
a committed line of credit as part of its default resources up to the 
amount needed to satisfy the ``one-day settlement cycle'' liquidity 
requirement after cash or cash equivalents have been applied. 
Accordingly, the Commission is proposing Sec.  39.11(e)(3) to clarify 
that a committed line of credit or similar facility is a permitted 
default resource up to the amount provided for in Sec.  
39.11(e)(1)(ii), provided, however, that it is not counted twice to 
meet the requirements of Sec.  39.11(e)(1)(ii) and Sec.  
39.11(e)(2).\31\ The Commission is also proposing clarifying changes to 
the text of Sec.  39.11(e)(1)(iii) and (e)(2).
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    \29\ See Financial Resources Requirements for Derivatives 
Clearing Organizations, 75 FR 63113, 63116 (Oct. 14, 2010) (proposed 
rule).
    \30\ In the notice of proposed rulemaking for Sec.  39.11, the 
Commission noted that a committed line of credit or similar facility 
is not listed as a financial resource available to a DCO to satisfy 
the requirements of Sec.  39.11(a)(1) and (2). The Commission 
further noted that a DCO may use a committed line of credit or 
similar facility only to meet the liquidity requirements set forth 
in Sec.  39.11(e)(1) and (2). Id. See also Derivatives Clearing 
Organization General Provisions and Core Principles, 76 FR at 69350 
(affirming this approach).
    \31\ The Commission is proposing to renumber current Sec.  
39.11(e)(3) as Sec.  39.11(e)(4).
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    In addition, the Commission is proposing to change references to 
``daily settlement pay'' in Sec.  39.11(e)(1)(ii) to ``daily settlement 
variation pay'' in order to clarify that additional calls for

[[Page 22234]]

initial margin should not be included in the calculation.
4. Reporting Requirements--Sec.  39.11(f)
    Regulation 39.11(f) sets forth reporting requirements for DCOs 
concerning the financial resources they are required to maintain 
pursuant to Sec.  39.11(a). After Sec.  39.11(f) was adopted, the 
Commission adopted Sec. Sec.  39.33(a) and 39.39(d), which set forth 
financial resources requirements for SIDCOs and subpart C DCOs, and 
financial resources requirements for the recovery and wind-down plans 
of SIDCOs and subpart C DCOs, respectively. The Commission is proposing 
to amend several provisions of Sec.  39.11(f) by adding the words ``and 
Sec. Sec.  39.33(a) and 39.39(d), if applicable,'' to clarify that 
financial resources reporting by SIDCOs and subpart C DCOs should 
encompass all financial resources requirements applicable to them under 
part 39.
5. Financial Statements--Sec.  39.11(f)(1)(ii)
    Regulation 39.11(f)(1)(ii) requires a DCO to file with the 
Commission each fiscal quarter, or at any time upon Commission request, 
a financial statement, including the balance sheet, income statement, 
and statement of cash flows, of the DCO or of its parent company. Since 
Sec.  39.11(f)(1)(ii) was implemented, some DCOs have filed the 
financial statements of their parent companies. Because some of these 
DCOs are part of a complex corporate structure, Commission staff has 
had difficulty determining whether the entity covered by a particular 
financial statement is the true, direct parent of the relevant DCO, 
which, in turn, makes it difficult to accurately assess the financial 
strength of the DCO. Therefore, the Commission is proposing to revise 
Sec.  39.11(f)(1)(ii) to require that the financial statement provided 
be that of the DCO and not the parent company.
    In further regard to Sec.  39.11(f)(1)(ii), the Commission has 
received many inquiries concerning the accounting standards that apply 
to the preparation of the DCO's financial statements. Generally, 
Commission regulations require financial statements to be prepared in 
accordance with U.S. generally accepted accounting principles (U.S. 
GAAP).\32\ Therefore, the Commission would expect DCOs to provide 
financial statements prepared in accordance with U.S. GAAP. However, 
the Commission recognizes that DCOs organized outside the United States 
may prepare their financial statements in accordance with International 
Financial Reporting Standards (IFRS) issued by the International 
Accounting Standards Board (IASB), or pursuant to other country-
specific accounting standards. The Commission has permitted commodity 
pool operators to file commodity pool financial statements prepared in 
accordance with IFRS if the pool is organized under the laws of a 
foreign jurisdiction, and certain other conditions are met.\33\
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    \32\ See, e.g., Sec. Sec.  1.10(d)(3), 4.22(d), and 
38.1101(b)(1).
    \33\ See Sec.  4.22(d)(2).
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    The Commission notes that the Securities and Exchange Commission 
(SEC) has adopted financial reporting requirements for securities 
clearing agencies that require U.S. GAAP, but permit the use of IFRS by 
clearing agencies that are ``incorporated or organized under the laws 
of any foreign country.'' \34\ The SEC stated in its adopting release 
that it also recognizes the ``advantages of financial statement 
disclosure that are limited to more widely applied bases of accounting 
and may offer more utility to market participants, regulators, and 
other stakeholders of clearing agencies.'' \35\ Therefore, it limited 
the different bases of accounting upon which annual audited financial 
statements may be prepared to IFRS and U.S. GAAP.\36\
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    \34\ 17 CFR 240.17Ad-22(c)(2)(ii).
    \35\ Clearing Agency Standards, 77 FR 66220, 66244 (Nov. 2, 
2012) (final rule).
    \36\ See id.
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    The Commission therefore is proposing to revise Sec.  
39.11(f)(1)(ii) to clarify that the financial statement must be 
prepared in accordance with U.S. GAAP for DCOs incorporated or 
organized under U.S. law, and in accordance with either U.S. GAAP or 
IFRS issued by the IASB for DCOs incorporated or organized under the 
laws of any foreign country.
    In reviewing DCOs' financial statements, Commission staff has noted 
that assets allocated by the DCO to meet the requirements of Sec.  
39.11(a)(1) or (2) often are not identified accordingly. The Commission 
therefore is proposing in Sec.  39.11(f)(1)(ii) and (f)(2)(i) 
(discussed below) to require that assets allocated by the DCO for such 
purpose must be clearly identified on the DCO's balance sheet as held 
for that purpose.
    In addition, the Commission is proposing to renumber current Sec.  
39.11(f)(2) as Sec.  39.11(f)(1)(iv) and amend it to incorporate the 
language of current Sec.  39.11(f)(4), which requires a DCO to submit 
its quarterly financial report no later than 17 business days after the 
end of the DCO's fiscal quarter or at a later time as permitted by the 
Commission in its discretion in response to a DCO's request for an 
extension.
6. Annual Reporting--Sec.  39.11(f)(2)
    The Commission is proposing to revise Sec.  39.11(f)(2) to set 
forth a DCO's annual financial reporting requirements (currently set 
forth in Sec.  39.19(c)(3)(ii), which would also be revised) in the 
same way Sec.  39.11(f)(1) sets forth a DCO's quarterly financial 
reporting requirements (which are cross-referenced in Sec.  
39.19(c)(2)).
    In addition to its audited year-end financial statement, a DCO 
would be required to submit: (1) A reconciliation, including 
appropriate explanations, of its balance sheet when material 
differences exist between it and the balance sheet in the DCO's 
financial statement for the last quarter of the fiscal year or, if no 
material differences exist, a statement so indicating, and (2) such 
further information as may be necessary to make the statements not 
misleading. Commission staff has encountered situations in which 
significant discrepancies exist between a DCO's financial statements 
for the last quarter of its fiscal year and its audited year-end 
financial statement. There is often a simple explanation for this, 
e.g., the discrepancies reflect a material change in a given foreign 
exchange rate. The Commission believes a reconciliation will help 
explain these discrepancies and will aid its review of the DCO's 
financial statements.
7. Documentation Requirements--Sec.  39.11(f)(3)
    Current Sec.  39.11(f)(3) requires a DCO to provide to the 
Commission certain documentation related to its quarterly financial 
reporting.\37\ The Commission has determined that requiring this 
documentation each quarter is unnecessary where there is no change from 
the prior submission. Therefore, the Commission is proposing to revise 
Sec.  39.11(f)(3) to clarify that a DCO must send the documentation to 
the Commission required under current paragraphs (f)(3)(i) and (ii) 
(proposed to be renumbered as paragraphs (f)(3)(i)(A) and (i)(B)) only 
upon the DCO's first submission under Sec.  39.11(f)(1) and in the 
event of any change thereafter.
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    \37\ The documentation explains (1) the methodology used to 
compute financial resources requirements, and (2) the basis for the 
DCO's determinations regarding valuation and liquidity requirements.
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    The Commission also is proposing to renumber Sec.  
39.11(f)(3)(iii), which concerns providing copies of agreements 
establishing or amending a credit facility, insurance coverage, or 
other arrangement, as Sec.  39.11(f)(3)(ii),

[[Page 22235]]

and add language specifying that copies of the agreements should 
evidence or support the DCO's ability to meet applicable financial 
resources and liquidity resources requirements.
8. Certification--Sec.  39.11(f)(4)
    After Sec.  39.11 was adopted, the Division advised DCOs that the 
quarterly financial report required under paragraph (f) should be 
accompanied by a certification as to the accuracy of the report signed 
by the person responsible for the accuracy and completeness of the 
report.\38\ Such certification is required for submission of annual 
chief compliance officer reports and Form 1-FR by FCMs, and is also 
appropriate in these circumstances.\39\ The Commission is proposing to 
amend Sec.  39.11(f)(4) to add this new requirement.
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    \38\ Memorandum to All Registered DCOs from Ananda 
Radhakrishnan, Director, Division of Clearing and Risk, June 7, 
2012.
    \39\ See 17 CFR 39.10(c)(4)(ii) (requiring certification of 
annual reports by chief compliance officers); 17 CFR 1.10(d)(4) 
(requiring certification of financial reports submitted by FCMs and 
introducing brokers); see also 17 CFR 4.22(h) (requiring commodity 
pool operators to certify periodic and annual financial reports); 17 
CFR 4.27(e)(1) (requiring commodity pool operators and commodity 
trading advisors to certify periodic reports).
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C. Participant and Product Eligibility--Sec.  39.12

    Regulation 39.12 implements Core Principle C, which requires a DCO 
to establish admission and continuing eligibility standards for its 
members, as well as standards for determining the eligibility of 
agreements, contracts, or transactions submitted to the DCO for 
clearing. Several provisions in Sec.  39.12 require a DCO to ``adopt'' 
or ``establish'' rules. The Commission is proposing to amend those 
provisions to require a DCO to ``have'' rules.\40\
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    \40\ The Commission is also proposing to renumber paragraphs 
(a)(5)(i)(A) and (B) and (a)(5)(ii) of Sec.  39.12(a)(5) as 
paragraphs (a)(5)(ii), (iii), and (iv), respectively.
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    Regulation 39.12(b)(2) provides that a DCO shall adopt rules 
providing that all swaps with the same terms and conditions are 
economically equivalent within the DCO. The Commission recognizes that 
some DCOs do not clear swaps and it was not the intention of the 
Commission to require DCOs that do not clear swaps to adopt the rules 
required under this provision. Therefore, the Commission is proposing 
to revise Sec.  39.12(b)(2) so that it explicitly applies only to DCOs 
that clear swaps.

D. Risk Management--Sec.  39.13

    Regulation 39.13 implements Core Principle D, which establishes 
risk management standards for DCOs. The Commission is proposing to 
clarify several aspects of Sec.  39.13.
1. Risk Management Framework--Sec.  39.13(b)
    Regulation 39.13(b) requires a DCO to establish and maintain 
written policies, procedures, and controls, approved by its board of 
directors, which establish an appropriate risk management framework. 
The introductory heading to this provision states that it is a 
``[d]ocumentation requirement.'' The Commission is proposing to replace 
``[d]ocumentation requirement'' with ``[r]isk management framework'' 
and is also proposing to replace the words ``establish and maintain'' 
with ``have and implement'' to make it clear that a DCO is not only 
required to have a documented risk management framework but to put it 
into action.
2. Limitation of Exposure to Potential Default Losses--Sec.  39.13(f)
    Regulation 39.13(f) requires a DCO to limit its exposure to 
potential losses from clearing member defaults to ``ensure'' that the 
DCO's operations would not be disrupted and non-defaulting clearing 
members would not be exposed to unanticipated or uncontrollable losses. 
The Commission recognizes that a DCO cannot ensure protection from that 
which it cannot anticipate. Therefore, the Commission is proposing to 
replace ``ensure'' with ``minimize the risk'' and make conforming 
changes to paragraphs (f)(1) and (2) of Sec.  39.13.
3. Margin Requirements--Sec.  39.13(g)
a. Methodology and Coverage--Sec.  39.13(g)(2)
    Regulation 39.13(g)(2)(i) requires that a DCO have initial margin 
requirements that are commensurate with the risks of each product and 
portfolio, including any unusual characteristics of, or risks 
associated with, particular products or portfolios. The regulation 
currently notes that such risks ``include[ ] but [are] not limited to 
jump-to-default risk or similar jump risk.'' The Commission is 
proposing to amend Sec.  39.13(g)(2)(i) to note that such risks also 
include ``concentration of positions.'' Recent events, including a 
significant loss from a default at a central counterparty outside of 
the Commission's jurisdiction, highlight the importance of addressing 
those risks.
b. Independent Validation--Sec.  39.13(g)(3)
    Regulation 39.13(g)(3) requires that a DCO's systems for generating 
initial margin requirements, including its theoretical models, be 
reviewed and validated by a qualified and independent party on a 
regular basis. The provision further provides that the validation may 
be conducted by independent contractors or employees of the DCO, as 
long as they are not responsible for the development or operation of 
the systems and models being tested. The Commission is proposing to 
amend this provision to specify that ``on a regular basis'' means 
annually and to also permit employees of an affiliate of the DCO to 
conduct the validations. Based on experience since the provision was 
adopted, the Commission believes an annual validation is sufficient. 
The Commission also believes it is appropriate to permit employees of 
an affiliate of the DCO to conduct the validations because, as with 
independent contractors or employees of the DCO, the main concern is 
that they not be persons responsible for development or operation of 
the systems and models being tested.
c. Spreads and Portfolio Margins--Sec.  39.13(g)(4)
    The Commission is amending Sec.  39.13(g)(4) to substitute the 
phrase ``conceptual basis'' for the phrase ``theoretical basis'' in the 
discussion of spread margin. This change would not alter the meaning of 
the rule but would simply make the terminology consistent with that 
used in the other Commission regulations.\41\
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    \41\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 81 FR 636, 658 (Jan. 6, 2016).
---------------------------------------------------------------------------

d. Back Tests--Sec.  39.13(g)(7)
    The Commission is proposing new Sec.  39.13(g)(7)(iii) to clarify 
that, in conducting back tests of initial margin requirements, a DCO 
should compare portfolio losses only to those components of initial 
margin that capture changes in market risk factors.
e. Gross Customer Margin--Sec.  39.13(g)(8)(i)
    Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin 
on a gross basis for each clearing member's customer account(s). After 
the regulation was adopted, Division staff received several inquiries 
regarding whether the provision applied to intraday settlements as well 
as end-of-day settlements. In response, the Division advised DCOs that 
the provision requires a DCO to collect

[[Page 22236]]

customer initial margin on a gross basis during any settlement cycle 
(end-of-day or intraday) in which the DCO collects customer initial 
margin. The Division also asked DCOs to notify the Division, in 
writing, of any issues that could prevent a DCO from fully complying 
with this requirement.\42\
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    \42\ Memorandum to All Registered DCOs from Ananda 
Radhakrishnan, Director, Division of Clearing and Risk, July 19, 
2012.
---------------------------------------------------------------------------

    Although Sec.  39.13(g)(8)(i) does not differentiate between end-
of-day and intraday collections of customer initial margin, there are 
significant operational issues that may affect the ability of clearing 
members to accurately determine the positions of individual customers 
on an intraday basis with respect to certain types of transactions 
(e.g., transfers, give-ups, and allocations of block orders) and with 
respect to certain types of market participants (e.g., locals and high 
frequency traders). Therefore, intraday gross margin calculations may 
result in some clearing members being charged too much margin and 
others being charged too little margin, which could necessitate 
significant end-of-day adjustments.
    Regulation 39.13(g)(8)(i) is premised upon the ability of a DCO to 
accurately determine the initial margin amounts that would be required 
for each individual customer if each individual customer were a 
clearing member. Accordingly, the Commission is proposing to amend 
Sec.  39.13(g)(8)(i) to require a DCO to collect customer initial 
margin from its clearing members on a gross basis only during its end-
of-day settlement cycle, in light of the operational issues that may 
arise intraday. However, the Commission strongly encourages DCOs to 
collect customer initial margin from their clearing members on a gross 
basis during any intraday settlement cycle in which the DCOs collect 
customer initial margin, if they are able to calculate the margin 
accurately. The Commission requests comment as to whether this is the 
correct approach or whether there are other alternatives that would 
address the collection of intraday gross margin.
    Currently, Sec.  39.13(g)(8)(i)(B) provides that for purposes of 
calculating the gross initial margin requirement for clearing members' 
customer accounts, to the extent not inconsistent with other Commission 
regulations, a DCO may require its clearing members to report the gross 
positions of each individual customer to the DCO, or it may permit each 
clearing member to report the sum of the gross positions of its 
customers to the DCO. Regulation 39.13(g)(8)(i)(C) further provides 
that for purposes of paragraph (g)(8), a DCO may rely, and may permit 
its clearing members to rely, upon the sum of the gross positions 
reported to the clearing members by each domestic or foreign omnibus 
account that they carry, without obtaining information identifying the 
positions of each individual customer underlying such omnibus accounts. 
In addition, Sec.  39.19(c)(5)(iii) currently requires a DCO to file 
with the Commission, for each customer origin of each clearing member, 
the end-of-day gross positions of each beneficial owner, upon 
Commission request.
    The Commission believes the ability to analyze positions at the 
customer level is a crucial element of an effective risk surveillance 
program. For example, a clearing member account that is composed of 
1,000 customers each holding one contract poses substantially less 
financial risk to the clearing member and to the DCO than a clearing 
member account composed of one customer holding 1,000 contracts. The 
ability to identify those customers whose positions create the most 
risk to a DCO's clearing members would assist the Commission in 
determining whether adequate measures are in place to address those 
risks and whether the Commission needs to take proactive steps to see 
that those risks are mitigated.
    When the part 39 regulations were adopted, the Commission 
determined to allow a DCO to permit its clearing members to report the 
sum of the gross positions of their customers to the DCO without 
obtaining information identifying the positions of each individual 
customer underlying such clearing members' omnibus accounts. The 
Commission also determined not to require routine reporting of end-of-
day gross positions of each beneficial owner to the Commission, in part 
because of concerns about the difficulty that DCOs would have in 
obtaining this information.\43\ Subsequently, however, the Commission 
adopted Sec.  22.11(c), which requires FCMs to report customer 
information about swaps to DCOs.\44\ Thus, for swaps, DCOs now have 
data that they did not have fully available to them at the time part 39 
was adopted. Moreover, the Commission has established a reporting 
protocol for this data, which can be used for submitting futures data 
as well.
---------------------------------------------------------------------------

    \43\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69375, 69400.
    \44\ Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy 
Provisions, 77 FR 6336, 6376 (Feb. 7, 2012) (codified at 17 CFR 22).
---------------------------------------------------------------------------

    To avoid a potential regulatory gap, the Commission is proposing to 
require a DCO to have rules requiring its clearing members to report 
customer information about futures (as well as swaps) to DCOs. This 
will enable DCOs, in turn, to report this information to the 
Commission, as discussed further below with respect to the proposed 
amendment to Sec.  39.19(c)(1)(i)(D). Specifically, the proposed 
amendments to Sec.  39.13(g)(8)(i)(B) would require a DCO to have rules 
that require its clearing members to provide reports to the DCO each 
day setting forth end-of-day gross positions of each beneficial owner 
within each customer origin of the clearing member.\45\
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    \45\ In this regard, the Commission is also proposing to amend 
Sec.  39.13(g)(8)(i)(B) by changing ``may'' to ``shall,'' deleting 
``to the extent not inconsistent with other Commission regulations'' 
and ``or it may permit each clearing member to report the sum of the 
gross positions of its customers to the derivatives clearing 
organization,'' deleting paragraph (C), and renumbering paragraphs 
(D) and (E).
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f. Customer Initial Margin Requirements--Sec.  39.13(g)(8)(ii)
    Regulation 39.13(g)(8)(ii) provides that a DCO must require its 
clearing members to collect customer initial margin from their 
customers, ``for non-hedge positions, at a level that is greater than 
100 percent of the [DCO]'s initial margin requirements with respect to 
each product and swap portfolio.'' Historically, DCMs had set customer 
initial margin requirements for their FCM members,\46\ and the 
Commission stated that this provision simply shifts the responsibility 
for establishing customer initial margin requirements from DCMs to 
DCOs.\47\ The Commission also noted its belief that requiring an FCM to 
collect higher customer initial margin for ``non-hedge positions'' 
provides a valuable cushion of readily available customer margin 
collateral.\48\
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    \46\ The Commission is proposing to amend Sec.  39.13(g)(8)(ii) 
and (iii) to clarify that these provisions apply to FCM clearing 
members only.
    \47\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69377.
    \48\ Id. at 69378.
---------------------------------------------------------------------------

    After Sec.  39.13(g)(8)(ii) was adopted, the Division issued 
interpretative guidance addressing several aspects of the regulation in 
response to a request from Chicago Mercantile Exchange, Inc. (CME), a 
registered DCO.\49\ The Commission is proposing to amend Sec.  
39.13(g)(8)(ii) in a manner consistent

[[Page 22237]]

with the interpretative guidance provided in the Division's letter, as 
discussed further below.
---------------------------------------------------------------------------

    \49\ CFTC Letter No. 12-08 (Sept. 14, 2012); see also Letter 
from Lisa Dunsky, Executive Director and Associate General Counsel, 
Chicago Mercantile Exchange Inc., to Ananda Radhakrishnan, Director, 
Division of Clearing and Risk (Aug. 29, 2012).
---------------------------------------------------------------------------

    In its request, CME asked for clarification as to the meaning of 
the term ``non-hedge positions.'' CME explained that DCM requirements 
for collection of higher customer initial margin had been applied 
historically on an account, rather than a position, basis. Under 
existing rules or practices at various DCMs, exchange members, market 
makers, market professionals, and certain other categories of customers 
had been subject to the clearing initial margin requirement; i.e., such 
exchange member accounts were designated as ``hedge'' or ``member,'' 
and by virtue of this designation, received the lower clearing initial 
margin rate, even though there may have been speculative positions in 
the accounts.
    CME also inquired as to the applicability of Sec.  39.13(g)(8)(ii) 
to non-clearing FCM customer omnibus accounts at clearing FCMs. CME 
stated that a non-clearing FCM's customer omnibus account may be 
comprised of both hedge accounts and speculative accounts, and the 
clearing FCM typically did not know the identity of the underlying 
customers in a non-clearing FCM's omnibus account. The non-clearing FCM 
sets customer initial margin requirements based on whether a customer 
account is designated as ``hedge'' or ``speculative.'' Thus, a 
speculative account included within an omnibus account already would 
have been assessed the higher customer initial margin requirement by 
such customer's non-clearing FCM. If the clearing FCM were required to 
apply the higher customer initial margin rate to the entire customer 
omnibus account, this would require the non-clearing FCM to either (1) 
post more collateral with the clearing FCM than the amount actually 
collected from its hedge customers in the omnibus account, or (2) 
collect the higher customer initial margin requirement from its hedge 
customers so that it could post this collateral with the clearing FCM.
    In its response to CME's request, the Division stated that it 
interprets Sec.  39.13(g)(8)(ii) ``in a manner that preserves the 
historical customer margining practices applicable to FCMs . . . 
[noting that] FCMs are expected to continue the practice of collecting 
customer initial margin at a level higher than the minimum required, if 
such action is warranted based on the unique risk profile of an 
individual customer.'' The Commission agrees with such interpretation 
and accordingly, is proposing to revise Sec.  39.13(g)(8)(ii) to permit 
DCOs to continue the practice of establishing customer initial margin 
requirements based on the type of customer account and by applying 
prudential standards that result in FCMs collecting customer initial 
margin at levels commensurate with the risk presented by each customer 
account.
    The Commission therefore proposes to amend Sec.  39.13(g)(8)(ii) by 
deleting the reference to ``non-hedge'' positions, changing the 
reference to ``a level that is greater than 100 percent'' to ``a level 
that is not less than 100 percent,'' clarifying that the customer 
initial margin level is measured against ``clearing'' initial margin 
requirements, and explicitly stating that customer initial margin 
levels must be ``commensurate with the risk presented by each customer 
account.''
    The Commission believes that establishing a bright-line test to 
determine the appropriate percentage by which customer initial margin 
requirements must exceed clearing initial margin requirements with 
respect to any particular types of customer accounts is inappropriate 
because the circumstances for each DCO and the nature of its clearing 
members and their customers vary. In adopting Sec.  39.13(g)(8)(ii), 
the Commission noted that the percentage ``should be based on the 
nature and volatility patterns of the particular product or swap 
portfolio, and the DCO's related evaluation of the potential risks 
posed by customers in general to their clearing members and, in turn, 
the potential risks posed by such clearing members in general to the 
DCO, rather than the creditworthiness of particular customers.'' \50\ 
The Commission requests comment as to whether it should add standards 
or further direction in Sec.  39.13(g)(8)(ii), or provide guidance to 
further clarify what would be considered ``commensurate with the risk 
presented,'' similar to the Commission's statement in the adopting 
release noted above.
---------------------------------------------------------------------------

    \50\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69378.
---------------------------------------------------------------------------

    The Commission is proposing to amend the language in Sec.  
39.13(g)(8)(ii) that gives the DCO reasonable discretion in determining 
the percentage by which customer initial margin requirements must 
exceed the DCO's clearing initial margin requirements with respect to 
particular products or portfolios, by replacing ``the percentage by 
which'' with ``whether and by how much.'' However, the proposed 
amendments to Sec.  39.13(g)(8)(ii) would give the Commission the 
ability to require different customer initial margin levels if the 
Commission deems the levels insufficient to protect the financial 
integrity of the DCO or its clearing members. Since the adoption of 
Sec.  39.13(g)(8)(ii), DCOs have typically added a 10 percent increase 
to the clearing initial margin requirement to set the higher customer 
initial margin requirement. The Commission has generally found this to 
be adequate in ordinary market conditions.
g. Haircuts--Sec.  39.13(g)(12)
    Regulation 39.13(g)(12) requires a DCO to apply appropriate 
reductions in value to reflect credit, market, and liquidity risks 
(haircuts), to the assets that it accepts in satisfaction of initial 
margin obligations. This provision also requires a DCO to evaluate the 
appropriateness of the haircuts ``on at least a quarterly basis.'' 
Regulation 39.11(d)(1) requires that haircuts be evaluated on a monthly 
basis for assets that are used to meet the DCO's financial resources 
obligations set forth in Sec.  39.11(a). The Commission is proposing to 
amend Sec.  39.13(g)(12) to align it with Sec.  39.11(d)(1) by 
requiring that DCOs evaluate the appropriateness of the haircuts that 
they apply to assets accepted in satisfaction of initial margin 
obligations on a monthly basis. Given that initial margin is held for 
risk management purposes, and the value of these assets change 
frequently, the Commission believes it would be more appropriate to 
assess haircuts more frequently.
4. Other Risk Control Mechanisms--Sec.  39.13(h)
a. Risk Limits--Sec.  39.13(h)(1)
    Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on 
each clearing member, by house origin and by each customer origin, in 
order to prevent a clearing member from carrying positions for which 
the risk exposure exceeds a specified threshold relative to the 
clearing member's and/or the DCO's financial resources. The Commission 
is proposing to clarify that such risk limits should also be imposed to 
address positions that may be difficult to liquidate. This might be the 
case, for example, in instances where a position in a particular 
contract or swap is concentrated with a particular member, such that 
there is reason to doubt whether, in the event that this member 
defaults, other members would be willing and able to accept, 
collectively, the entirety of that position or swap. As noted above, in 
section IV.D.3.a, recent events highlight the importance of imposing 
risk limits to address positions that may be difficult

[[Page 22238]]

to liquidate, particularly concentrated positions.
b. Clearing Members' Risk Management Policies and Procedures--Sec.  
39.13(h)(5)
    Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis, 
review the risk management policies, procedures, and practices of each 
of its clearing members, which address the risks that such clearing 
members may pose to the DCO, and to document such reviews. The 
Commission is proposing to clarify that DCOs should, having conducted 
such reviews, ``take appropriate actions to address concerns identified 
in such reviews,'' and that the documentation of the reviews should 
include ``the basis for determining what action was appropriate to 
take.'' The Commission notes that, where a DCO is required to conduct 
any type of review under Commission regulations, similar remediation 
and documentation is expected. Absent such follow-up, the reviews would 
lack purpose.
5. Cross-Margining Arrangements--Sec.  39.13(i)
    A cross-margining arrangement allows a DCO to provide offsets or 
reductions in required margin between products that it and another DCO 
(or other clearing organization) clear if the risk of one product is 
significantly and reliably correlated with the risk of the other 
product. The Commission approved the first cross-margining arrangement 
in 1988, and it has approved many such arrangements since.\51\ Proposed 
Sec.  39.13(i) would codify the Commission's existing practices for 
evaluating cross-margining arrangements.\52\
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    \51\ The Commission has issued a number of cross-margining 
program orders, including, but not limited to: A June 1, 1988 order 
approving a proprietary cross-margining system between the 
Intermarket Clearing Corporation (ICC) and Options Clearing 
Corporation (OCC), as expanded by a November 26, 1991 order 
approving the addition of cross-margining of positions of market 
professionals in non-proprietary accounts of participating clearing 
members to the ICC/OCC cross-margining program, 56 FR 61406 (Comm. 
F. T. Comm'n Dec. 3, 1991), and as further amended by a January 22, 
1996 order to incorporate the provisions of appendix B, Framework 1 
to the Commission's part 190 Regulations; a September 26, 1989 order 
approving a proprietary cross-margining system between OCC and CME, 
as expanded by a November 26, 1991 order approving the addition of 
cross-margining of positions of market professionals in non-
proprietary accounts of participating clearing members to the OCC/
CME cross-margining program, 56 FR 61404 (Comm. F. T. Comm'n Dec. 3, 
1991); a June 2, 1993 order approving the proposals of CME and ICC 
to implement a tri-lateral cross-margining program with OCC, as 
further amended by a January 22, 1996 amended order to reflect the 
approval of proposed changes to the CME/ICC/OCC cross-margining 
amendments for proprietary and market professional accounts to 
incorporate the provisions of appendix B, Framework 1 to the 
Commission's part 190 Regulations; a November 5, 2004 order 
approving the establishment of an internal cross-margining program 
that permits cross-margining of positions of market professionals in 
internal non-proprietary accounts of OCC clearing members; and a 
February 29, 2008 order approving the establishment of a non-
proprietary cross-margining agreement between the OCC and ICE Clear 
US, Inc. The Commission has also allowed cross-margining programs 
into effect without Commission approval including, but not limited 
to, a proprietary cross-margining program between CME and the London 
Clearing House (allowed into effect without approval on March 23, 
2000).
    \52\ In February 2015, CPMI-IOSCO issued a Level 2 assessment 
report on implementation of the PFMIs by CCPs and trade repositories 
in the U.S. (Implementation Report). See CPMI-IOSCO, Implementation 
monitoring of PFMIs: Level 2 assessment report for central 
counterparties and trade repositories--United States (Feb. 2015), 
available at http://www.bis.org/cpmi/publ/d126.pdf. The 
Implementation Report noted that Commission regulations do not 
explicitly address cross-margining, and in particular, the risk 
management requirements necessary where two or more CCPs participate 
in cross-margining arrangements. The Commission notes that existing 
DCO Core Principles and regulations regarding risk management, 
treatment of customer funds, default and settlement procedures, 
taken as a whole, address cross-margining arrangements.
---------------------------------------------------------------------------

    In evaluating cross-margining arrangements, the Commission reviews: 
(1) The methodology to be used to calculate margin requirements for the 
positions subject to the cross-margining arrangement; (2) the 
correlation between the positions, including the stability of the 
relationship among the eligible products and the potential impact a 
change in the correlation could have on setting margin requirements; 
(3) the impact on the settlement process; and (4) the application of 
default procedures, including any loss-sharing arrangements, pursuant 
to the proposed arrangement. If only one of the clearing organizations 
participating in the arrangement is a registered DCO, the Commission 
looks at additional factors, including the other clearing 
organization's status with and oversight by other regulator(s). Also, 
if one of the clearing organizations is organized outside of the United 
States, the Commission evaluates the bankruptcy treatment in that 
clearing organization's jurisdiction. Finally, the Commission considers 
the impact of the cross-margining arrangement, if any, on the DCO's 
ability to comply with the DCO Core Principles, particularly those 
concerning financial resources and risk management. The Commission 
requests comment as to whether there are other factors the Commission 
should consider and, therefore, other information that it should 
request. The Commission is proposing to require a DCO to provide the 
relevant information needed to facilitate its review as part of a rule 
filing submitted for Commission approval pursuant to Sec.  40.5. The 
Commission requests comment as to whether this would be the appropriate 
process or whether a more or less detailed review process is 
appropriate given the factors and risks involved.
E. Treatment of Funds--Sec.  39.15
    Regulation 39.15 implements Core Principle F, which requires a DCO 
to establish standards and procedures designed to protect its clearing 
members' funds, hold such funds in a manner that would minimize the 
risk of loss or delay in the DCO's access, and invest such funds in 
instruments with minimal credit, market, and liquidity risks. The 
Commission is proposing to amend certain aspects of Sec.  39.15.
1. Segregation of Customer Funds--Sec.  39.15(b)(1)
    Regulation 39.15(b)(1) requires a DCO to comply with the applicable 
segregation requirements of section 4d of the CEA and Commission 
regulations thereunder, or any other applicable Commission regulation 
or order requiring that customer ``funds and assets'' be segregated, 
set aside, or held in a separate account. Section 4d of the CEA refers 
to customer ``money, securities and property.'' Therefore, the 
Commission is proposing to amend Sec.  39.15(b) to clarify that ``funds 
and assets'' are equivalent to ``money, securities, and property'' in 
order to better align the language of the regulation with the language 
in the statute.
2. Commingling in Cleared Swaps Customer Account--Sec.  39.15(b)(2)(i)
    Regulation 39.15(b)(2)(i) requires a DCO to file rules for 
Commission approval pursuant to Sec.  40.5 in order for the DCO and its 
clearing members to commingle customer positions in futures, options, 
and swaps, and any money, securities, or property received to margin, 
guarantee or secure such positions, in an account subject to the 
requirements of section 4d(f) of the CEA (i.e., the cleared swaps 
customer account). The Commission is proposing to revise Sec.  
39.15(b)(2)(i) to clarify that a DCO that wants to commingle foreign 
futures and foreign options with swaps must meet the same requirements.
3. Commingling in Futures Customer Account--Sec.  39.15(b)(2)(ii)
    Regulation 39.15(b)(2)(ii) requires a DCO to file a petition for an 
order pursuant to section 4d(a) of the CEA in order for the DCO and its 
clearing members to commingle customer positions in futures, options, 
and swaps, and any money, securities, or property

[[Page 22239]]

received to margin, guarantee or secure such positions, in an account 
subject to the requirements of section 4d(a) of the CEA. The Commission 
is proposing to revise Sec.  39.15(b)(2)(ii) to clarify that a DCO that 
wants to commingle foreign futures and foreign options with futures and 
options must meet the same requirements as a DCO that wants to 
commingle swaps with futures and options.
    Further, when Sec.  39.15(b)(2)(ii) was first promulgated, the 
Commission, in reference to its decision to require an order rather 
than a rule approval to commingle cleared swaps with futures in a 
futures account, stated ``at this time, it is appropriate to provide 
these additional procedural protections before exposing futures 
customers to the risks of swaps that may be commingled in a futures 
account.'' \53\ The Commission, however, acknowledged that ``as the 
Commission and the industry gain more experience with cleared swaps, 
the Commission may revisit this issue in the future.'' \54\ The 
Commission now believes that a request for a rule approval that 
complies with Sec.  40.5 will provide the Commission with sufficient 
means to determine whether customer funds held in a futures account 
will be adequately protected if cleared swaps, foreign futures, or 
foreign options are also held in the account.
---------------------------------------------------------------------------

    \53\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69392.
    \54\ Id.
---------------------------------------------------------------------------

    Therefore, the Commission is proposing to revise Sec.  
39.15(b)(2)(ii) to require a DCO to file rules for Commission approval 
pursuant to Sec.  40.5 in order for the DCO and its clearing members to 
commingle swaps, foreign futures, or foreign options with futures and 
options in an account subject to the requirements of section 4d(a) of 
the CEA.
4. Commission Action--Sec.  39.15(b)(2)(iii)
    Regulation 39.15(b)(2)(iii) provides that the Commission may 
``grant approval of'' a rule submission filed under Sec.  
39.15(b)(2)(i) in accordance with Sec.  40.5. The Commission is 
proposing to replace the words ``grant approval of'' with ``approve'' 
in order to be consistent with the language used in Sec.  40.5(b). 
Further, the Commission is proposing to amend Sec.  39.15(b)(2)(iii) to 
reflect the proposed changes to Sec.  39.15(b)(2)(ii). Specifically, 
the Commission is proposing to eliminate Sec.  39.15(b)(2)(iii)(A) and 
(B) and include the content of both paragraphs within Sec.  
39.15(b)(2)(iii).
5. Transfer of Customer Positions--Sec.  39.15(d)
    Regulation 39.15(d) requires a DCO to have rules providing for the 
prompt transfer of all or a portion of a customer's portfolio of 
positions and related funds at the same time from the carrying clearing 
member to another clearing member, without requiring the close-out and 
re-booking of the positions prior to the requested transfer.
    Some DCOs have noted that, although a DCO may transfer positions 
from one clearing member to another, the DCO does not generally 
transfer funds. The DCO simply adjusts the amount of margin due from, 
or owed to, each clearing member during the next collection cycle. 
Moreover, the receiving clearing member may not owe additional funds if 
it has sufficient excess margin funds on deposit at the DCO. The DCO 
may only transfer funds if it has already collected variation margin 
from the transferring clearing member and positions were transferred at 
the trade price. In addition, any excess margin held by the 
transferring clearing member would be transferred to the receiving 
clearing member.
    Accordingly, the Commission is proposing to amend Sec.  39.15(d) to 
delete the words ``at the same time,'' thus requiring the ``prompt,'' 
but not necessarily simultaneous, transfer of a customer's positions 
and related funds. The Commission is further amending the provision to 
require the transfer of related funds ``as necessary,'' recognizing 
that the transfer of customer positions will not always require the 
transfer of funds.
6. Permitted Investments--Sec.  39.15(e)
    Regulation 39.15(e) requires any investment of customer funds or 
assets by a DCO to comply with Sec.  1.25, as if all such funds and 
assets comprise customer funds subject to segregation pursuant to 
section 4d(a) of the CEA and Commission regulations thereunder. At the 
time Sec.  39.15(e) was adopted, the Commission had not yet adopted 
regulations concerning cleared swaps customer funds but intended for 
Sec.  39.15(e) to also apply to those funds. The Commission has since 
adopted the part 22 regulations and therefore is proposing to amend 
Sec.  39.15(e) to clarify that the requirement applies to any 
investment of customer funds or assets, including cleared swaps 
customer collateral as defined in Sec.  22.1.

F. Default Rules and Procedures--Sec.  39.16

    Regulation 39.16 codifies Core Principle G, which requires a DCO to 
have rules and procedures designed to allow for the efficient, fair, 
and safe management of events during which a clearing member becomes 
insolvent or otherwise defaults on its obligations to the DCO. Core 
Principle G also requires a DCO to clearly state its default 
procedures, make its default rules publicly available, and ensure that 
it may take timely action to contain losses and liquidity pressures 
while continuing to meet its obligations. The Commission is proposing 
to amend certain aspects of Sec.  39.16.\55\
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    \55\ The proposed amendments to Sec.  39.16 include replacing 
``adopt'' with ``have'' where a DCO is required to adopt rules, 
consistent with the proposed changes to Sec.  39.12 previously 
discussed.
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1. Default Management Plan--Sec.  39.16(b)
    Regulation 39.16(b) requires a DCO to have a default management 
plan and, among other things, test the plan at least on an annual 
basis. A DCO's default management plan involves its clearing members, 
so the Commission believes the plan cannot be tested effectively 
without the clearing members' participation. Accordingly, the 
Commission is proposing to amend Sec.  39.16(b) to add a requirement 
that the DCO include clearing members in a test of its default 
management plan on at least an annual basis. A DCO should ensure that a 
sufficient portion of its clearing membership participates in such 
testing and is therefore prepared to support the DCO's default 
management efforts.
2. Default Procedures--Sec.  39.16(c)
    Regulation 39.16(c) requires a DCO to adopt procedures that would 
permit the DCO to take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
default by one if its clearing members. The Commission is proposing to 
amend Sec.  39.16(c)(1) to require a DCO to have a default committee 
that would be convened in the event of a default involving substantial 
or complex positions to help identify market issues with any action the 
DCO is considering. The default committee would be required to include 
clearing members and could include other participants to help the DCO 
efficiently manage the house or customer positions of the defaulting 
clearing member.
    The Commission also is proposing to amend Sec.  39.16(c)(2)(ii) to 
require that a DCO have default procedures that include immediate 
public notice on the DCO's website of a declaration of default. The 
Commission believes it is important to the integrity and stability of 
the financial markets that clearing members, other CCPs, and the public

[[Page 22240]]

become aware as soon as possible when a default has occurred. The 
Commission requests comment, however, as to whether the timing of the 
announcement would potentially impact the market or the DCO's ability 
to manage the default.
    Finally, Sec.  39.16(c)(2)(iii)(C) requires any allocation of a 
defaulting clearing member's positions to be proportional to the size 
of the participating or accepting clearing member's positions in the 
same product class at the DCO. The Commission is proposing to amend 
this provision to clarify that the DCO shall not require a clearing 
member to bid for a portion of, or accept an allocation of, the 
defaulting clearing member's positions that is not proportional to the 
size of the bidding or accepting clearing member's positions in the 
same product class at the DCO. This is intended to clarify that a 
clearing member that wishes to voluntarily bid for or accept more than 
its proportional share should be allowed to do so, provided that the 
clearing member has the ability to manage the risk of the new 
positions.
    The Commission is proposing to further amend Sec.  
39.16(c)(2)(iii)(C) in order to clarify that the provision applies to 
both auctions and allocations and to provide that the size of the 
participating or accepting clearing member's positions in the same 
product class at the DCO should be measured by the clearing initial 
margin requirement for those positions. The Commission requests comment 
as to whether the Commission should require DCOs to take into 
consideration other indicators of active participation in a market, 
such as open interest, volume, and/or other criteria.

G. Rule Enforcement--Sec.  39.17

    Regulation 39.17(a) codifies Core Principle H, which requires a DCO 
to maintain adequate arrangements and resources for the effective 
monitoring and enforcement of compliance with its rules and dispute 
resolution. Core Principle H also requires a DCO to have the authority 
and ability to discipline, limit, suspend, or terminate the activities 
of a member or participant if it violates the DCO's rules. Finally, 
Core Principle H requires a DCO to report its rule enforcement 
activities and sanctions imposed on members and participants to the 
Commission. The Commission is proposing to amend Sec.  39.17(a)(1) to 
clarify the Commission's expectation that DCOs currently do, and will 
continue to, ensure that both the DCO and its members comply with the 
DCO's rules.
    Regulation 39.17(b) permits a DCO's board of directors to delegate 
its responsibility for compliance with the requirements of Sec.  
39.17(a) to the DCO's risk management committee. The Commission 
recognizes that some DCOs delegate such responsibility to a committee 
other than the risk management committee. Therefore, the Commission is 
proposing to amend Sec.  39.17(b) to replace ``risk management 
committee'' with ``an appropriate committee.''

H. Reporting--Sec.  39.19

    Regulation 39.19 implements Core Principle J, which requires that 
each DCO provide to the Commission all information that the Commission 
determines to be necessary to conduct oversight of the DCO. In addition 
to clarifying existing requirements, the Commission is proposing to 
adopt additional reporting requirements that would allow the Commission 
to conduct more effective oversight of DCO compliance with the DCO Core 
Principles and Commission regulations.
1. General--Sec.  39.19(a)
    The Commission is proposing to revise the text of Sec.  39.19(a) to 
match the text of Core Principle J. The proposed revisions are not 
meant to alter the meaning of the provision.
2. Submission of Reports--Sec.  39.19(b)
    Regulation 39.19(b)(1) requires a DCO to submit the information 
required by the section to be submitted to the Commission 
electronically and in a format and manner specified by the Commission, 
unless otherwise specified by the Commission or its designee. The 
Commission is proposing to delete ``[u]nless otherwise specified by the 
Commission or its designee'' and ``electronically,'' requiring a DCO to 
submit the information in a format and manner specified by the 
Commission. This would simplify the text while retaining the 
flexibility the Commission originally intended. The Commission is 
proposing new Sec.  39.19(b)(2) to require that when making a 
submission pursuant to the section, an employee of a DCO must certify 
that he or she is duly authorized to make such a submission on behalf 
of the DCO. This provision would codify existing practices with respect 
to the use of the CFTC Portal for submissions pursuant to Sec.  39.19. 
Finally, the Commission is proposing to remove existing Sec.  
39.19(b)(3) and move the definition of ``business day'' to Sec.  39.2, 
as previously discussed. Existing Sec.  39.19(b)(2) would be renumbered 
as Sec.  39.19(b)(3).
3. Daily Reporting of Information--Sec.  39.19(c)(1)(i)
    Regulation 39.19(c)(1)(i) requires a DCO to report to the 
Commission on a daily basis margin, cash flow, and position information 
for each clearing member, by house origin and by each customer origin. 
The Commission is proposing to amend Sec.  39.19(c)(1)(i) to require a 
DCO to additionally report margin, cash flow, and position information 
by individual customer account, which is information the DCOs currently 
provide. The Commission is specifying ``individual customer account,'' 
as individual customers may have multiple accounts, which should be 
reported separately. The Commission is also proposing to have DCOs 
provide any legal entity identifiers and internally-generated 
identifiers within each customer origin for each clearing member. The 
Commission is also proposing to amend Sec.  39.19(c)(1)(i)(D) to 
specify that, with respect to end-of-day positions, DCOs must report 
the positions themselves (i.e., the long and short positions) as well 
as risk sensitivities and valuation data for these positions.
    Risk-sensitivities are different measures of the impact of changes 
in underlying factors on the value of the positions. For example, an 
interest rate delta describes the theoretical profit or loss (``P&L'') 
that results from a one basis point increase in a currency's interest 
rate curve. A delta ladder describes a series of sensitivities for 
different maturity points (tenors) where each ``rung'' represents an 
increasing maturity point or tenor along the zero rate curve term 
structure. Each value on the rung represents the P&L that the portfolio 
would experience if the interest rate for that tenor were to increase 
by one basis point, all else being equal. Thus, if the entire curve 
were to shift up by one basis point, the portfolio's theoretical P&L 
would be equal to the sum of all the individual sensitivities. In the 
context of options, examples of risk sensitivities would be the 
different Greeks--delta measures an option's price sensitivity relative 
to changes in the price of the underlying asset, gamma measures the 
sensitivity of delta in response to price changes in the underlying 
instrument, vega measures an option's sensitivity to changes in the 
volatility of the underlying, theta measures the time decay of an 
option.
    Valuation data refer to variables and inputs that reflect current 
market conditions, as well as expectations for the future. In the case 
of credit default swaps, valuation models rely on for example, risk 
neutral default

[[Page 22241]]

probabilities of swaps, forward credit spreads for different 
maturities. For interest rate swaps, valuation models require discount 
factors.
    The Commission intends to implement a range of different 
methodologies to conduct risk surveillance of cleared derivatives 
exposures, some involving full revaluation of portfolios and others 
relying on delta ladders and other risk sensitivities. Collectively, 
the enhanced information sets will enable Commission staff to run 
stress tests; identify concentration and risk in currencies and in 
maturity buckets; perform back testing; validate guaranty funds; and 
validate variation margin.
4. Daily Reporting on Securities Positions--Sec.  39.19(c)(1)(ii)(C)
    Regulation 39.19(c)(1)(i) requires DCOs to submit certain 
information to the Commission on a daily basis, e.g., initial margin 
requirements, initial margin on deposit, daily variation margin, other 
daily cash flows such as option premiums, and end-of day positions. 
Paragraph (c)(1)(ii)(C) further instructs DCOs to provide the required 
information for all securities positions that are held in a customer 
account subject to section 4d of the CEA or are subject to a cross-
margining agreement. Paragraph (c)(1)(ii)(C) was added to clarify the 
applicability of daily reporting requirements to securities positions 
carried by FCMs that are also registered broker-dealers.
    Since the adoption of Sec.  39.19(c)(1), the Commission has become 
aware of a potential ambiguity in the wording of paragraph 
(c)(1)(ii)(C), which requires the reporting of all securities positions 
``that are held in a customer account subject to section 4d of the Act 
or are subject to a cross-margining agreement.'' The ambiguity concerns 
whether the reporting requirement for securities positions subject to a 
cross-margining agreement applies to customer positions only or to any 
position subject to a cross-margining agreement, whether house or 
customer.
    Reporting of securities positions is designed to capture positions 
that could have an impact on the risks a DCO must manage. Because risks 
associated with securities positions subject to a cross-margining 
agreement would be relevant to the DCO's risk management function and 
therefore the Commission's risk surveillance program, all such 
securities positions, whether house or customer, were intended to be 
included in daily reporting. In order to avoid ambiguity and more 
precisely articulate the scope of paragraph (c)(1)(ii)(C), the 
Commission is proposing to insert subordinate paragraph numbering 
between the clauses in paragraph (c)(1)(ii)(C) which relate to 
securities positions held in a customer account or subject to a cross-
margining agreement.
5. Quarterly Reporting--Sec.  39.19(c)(2)
    Regulation 39.19(c)(2) requires a DCO to provide the financial 
resources report required by Sec.  39.11(f). The Commission adopted 
Sec.  39.19(c)(2) so that each DCO reporting requirement would be 
included in Sec.  39.19. The Commission is proposing to revise the text 
of Sec.  39.19(c)(2) to be more consistent with the text of Sec.  
39.11(f); i.e., a DCO would be required to provide to the Commission 
each fiscal quarter, or at any time upon Commission request, a report 
of the DCO's financial resources as required by Sec.  39.11(f)(1).
6. Audited Year-End Financial Statements--Sec.  39.19(c)(3)(ii)
    Regulation 39.19(c)(3)(ii) requires a DCO to file with the 
Commission its audited year-end financial statements or, if there are 
no financial statements available for the DCO, the consolidated audited 
year-end financial statements of the DCO's parent company. As with the 
quarterly filing requirements of Sec.  39.11(f)(1)(ii), the purpose of 
requiring a DCO to submit year-end financial statements is to enable 
the Commission to assess the financial strength of the DCO. However, if 
a DCO is part of a large and complex corporate structure and files its 
parent company's financial statements, it can be difficult for the 
Commission to assess the financial strength of the DCO itself. 
Therefore, the Commission is proposing to amend Sec.  39.19(c)(3)(ii) 
to require the audited year-end financial statements of the DCO.
7. Time of Report--Sec.  39.19(c)(3)(iv)
    Regulation 39.19(c)(3)(iv) requires a DCO to submit concurrently to 
the Commission all reports required by paragraph (c)(3) not more than 
90 days after the end of the DCO's fiscal year. The Commission may 
provide an extension of time only if it determines that a DCO's failure 
to submit the report in a timely manner ``could not be avoided without 
unreasonable effort or expense.'' \56\ The Commission is proposing to 
eliminate this requirement to provide it with the flexibility to grant 
extensions under additional circumstances when appropriate.
---------------------------------------------------------------------------

    \56\ The Commission delegated this authority to the Director of 
the Division of Clearing and Risk under Sec.  140.94(c)(9).
---------------------------------------------------------------------------

    Additionally, the Commission is proposing to remove the requirement 
that reports be submitted concurrently in order to provide DCOs with 
the flexibility to submit reports required under Sec.  39.19(c)(3) as 
they are completed. The Commission recognizes that one report may be 
completed sooner than the other and believes it would benefit the 
Commission's oversight of the DCO if the Commission could begin 
reviewing the report as soon as it is ready.
8. Decrease in Financial Resources--Sec.  39.19(c)(4)(i)
    The Commission is proposing a technical amendment to Sec.  
39.19(c)(4)(i), which concerns reporting of a decrease in a DCO's 
financial resources. The amendment would add a reference to the 
financial resources requirements of Sec.  39.33, which applies to 
SIDCOs and subpart C DCOs. The Commission also is proposing to renumber 
the subordinate paragraphs for the sake of clarity.
9. Decrease in Liquidity Resources--Sec.  39.19(c)(4)(ii)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(ii),\57\ 
which would require the same reporting for a decrease in liquidity 
resources as that required by Sec.  39.19(c)(4)(i) for a decrease in 
overall financial resources. The reporting required in Sec.  
39.11(f)(1)(ii) provides the Commission with notice of any change in a 
DCO's liquidity resources over the course of a fiscal quarter. This new 
provision would provide the Commission with notice if a DCO has a 
significant decrease in liquidity resources over a short period of 
time, which could indicate there is a greater issue of which the 
Commission should be aware.
---------------------------------------------------------------------------

    \57\ The Commission is proposing to renumber existing Sec.  
39.19(c)(4)(ii) and all subsequent paragraphs of Sec.  39.19(c)(4).
---------------------------------------------------------------------------

10. Request to Clearing Member To Reduce Positions--Sec.  
39.19(c)(4)(vi)
    The Commission is proposing to amend current Sec.  39.19(c)(4)(v), 
proposed to be renumbered as Sec.  39.19(c)(4)(vi), which requires a 
DCO to notify the Commission immediately of a request by the DCO to one 
of its clearing members to reduce the clearing member's positions, by 
deleting the words ``because the [DCO] has determined that the clearing 
member has exceeded its exposure limit, has failed to meet an initial 
or variation margin call, or has failed to fulfill any other financial 
obligation to the [DCO].'' The Commission believes it should be

[[Page 22242]]

notified of such a request regardless of the reason for the request.
11. Change in Key Personnel--Sec.  39.19(c)(4)(x)
    The Commission is proposing to amend current Sec.  39.19(c)(4)(ix), 
proposed to be renumbered as Sec.  39.19(c)(4)(x), which requires a DCO 
to report to the Commission no later than two business days following 
the departure or addition of persons who are key personnel as defined 
in Sec.  39.2. The Commission proposes to clarify that the notification 
requirement applies to both temporary and permanent replacements, and 
that the report must include contact information.
12. Change in Legal Name--Sec.  39.19(c)(4)(xi)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xi), 
which would require a DCO to report a change to the legal name under 
which it operates. This requirement would help to ensure that DCO-
specific information reflected on the Commission's website, as well as 
in the Commission's internal records, is accurate and up-to-date. The 
Commission notes, however, that the DCO's registration order (and other 
existing orders issued by the Commission) would not need to be changed 
to reflect the legal name change.
13. Change in Liquidity Funding Arrangement--Sec.  39.19(c)(4)(xiii)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xiii), 
which would require a DCO to report a change in any liquidity funding 
arrangement it has in place. This requirement would be similar to that 
of Sec.  39.19(c)(4)(x) (proposed to be renumbered as Sec.  
39.19(c)(4)(xii)), which requires a DCO to report any change in a 
credit facility funding arrangement it has in place. This will assist 
the Commission in overseeing the liquidity risk management of DCOs.
14. Change in Settlement Bank Arrangements--Sec.  39.19(c)(4)(xiv)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xiv), 
which would require a DCO to report a change in its arrangements with 
any settlement bank used by the DCO or approved for use by the DCO's 
clearing members. Receiving such reporting will aid the Commission in 
monitoring a DCO's compliance with Sec.  39.14(c), which sets forth 
specific requirements for settlement arrangements.
15. Settlement Bank Issues--Sec.  39.19(c)(4)(xv)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xv), 
which would require a DCO to report to the Commission no later than one 
business day after learning of any material issues or concerns 
regarding the performance, stability, liquidity, or financial resources 
of any settlement bank used by the DCO or approved for use by the DCO's 
clearing members.
16. Change in Depositories for Customer Funds--Sec.  39.19(c)(4)(xvi)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xvi), 
which would require a DCO to report any change in its arrangements with 
any depositories at which the DCO holds customer funds. Receiving such 
reporting will aid the Commission in monitoring a DCO's compliance with 
section 4d of the CEA and related Commission regulations regarding the 
treatment of customer funds, including Sec.  39.15(b).
17. Change in Fiscal Year--Sec.  39.19(c)(4)(xx)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xx), 
which would require a DCO to immediately notify the Commission of any 
change to the start and end dates for its fiscal year. Because several 
other required reports are tied to a DCO's fiscal year (e.g., quarterly 
financial reports, annual report of the chief compliance officer), a 
change in the DCO's fiscal year would change the reporting periods and 
deadlines for those reports, and the Commission would need to know when 
those reports are to be submitted by the DCO.
18. Change in Independent Accounting Firm--Sec.  39.19(c)(4)(xxi)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xxi), 
which would require a DCO to report to the Commission no later than one 
business day after any change in the DCO's independent public 
accounting firm. The report would include the date of such change, the 
name and contact information of the new firm, and the reason for the 
change.
19. Major Decision of the Board of Directors--Sec.  39.19(c)(4)(xxii)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xxii) to 
codify in Sec.  39.19 the requirement (currently in Sec.  
39.32(a)(3)(i) and proposed in Sec.  39.24(a)(3)(i), as discussed 
further below) that a DCO report to the Commission any major decision 
of the DCO's board of directors.
20. Margin Model Issues--Sec.  39.19(c)(4)(xxiv)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xxiv), 
which would require a DCO to report to the Commission no later than one 
business day after any issue occurs with a DCO's margin model, 
including margin models for cross-margined portfolios, that affects the 
DCO's ability to calculate or collect initial margin or variation 
margin. The Commission is proposing this change because some DCOs have 
had unanticipated issues arise with the functioning of their margin 
models as a result of, among other things, the introduction of new 
products or significant increases in volatility.
21. Recovery and Wind-Down Plans--Sec.  39.19(c)(4)(xxv)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xxv), 
which would require a DCO that is required to maintain recovery and 
wind-down plans pursuant to Sec.  39.39(b) to submit its plans to the 
Commission no later than the date on which it is required to have the 
plans. The Commission is also proposing to permit a DCO that is not 
required to maintain recovery and wind-down plans pursuant to Sec.  
39.39(b), but which nonetheless maintains such plans, to submit the 
plans to the Commission. If a DCO subsequently revises its plans, the 
DCO would be required to submit the revised plans to the Commission 
along with a description of the changes and the reason for those 
changes. The Commission is proposing this requirement because Sec.  
39.39(b) requires certain DCOs to maintain recovery and wind-down 
plans, but there is currently no explicit requirement that the DCOs 
submit the plans to the Commission.
22. New Product Accepted for Clearing--Sec.  39.19(c)(4)(xxvi)
    The Commission is proposing to adopt new Sec.  39.19(c)(4)(xxvi), 
which would require a DCO to provide notice to the Commission no later 
than 30 calendar days prior to accepting a new product for clearing. 
The Commission is proposing this change because Sec.  40.2 requires a 
DCM or SEF to make a submission to the Commission prior to listing a 
product for trading that has not been approved under Sec.  40.3, but 
there is currently no comparable requirement applicable to DCOs.
    The proposed notice would include: (1) A brief description of the 
new product; (2) the date on which the DCO intends to begin accepting 
the new product for clearing; (3) a statement as to whether the new 
product will require

[[Page 22243]]

the DCO to submit any rule changes pursuant to Sec. Sec.  40.5 or 40.6; 
(4) a statement as to whether the DCO has informed, or intends to 
inform, its clearing members and/or the general public of the new 
product and, if written notice was given, a web address for or copy of 
such notice; and (5) an explanation of any substantive opposing views 
received from such outreach and how the DCO addressed such views or 
objections. The Commission believes receiving the notice 30 days before 
the DCO will begin accepting the product for clearing will allow 
Commission staff enough time to ask further questions of the DCO as 
necessary.
    The Commission has not defined ``product'' for purposes of Sec.  
40.2 or Sec.  40.3. The Commission requests comment on whether defining 
this term would be helpful in clarifying what products must be reported 
to the Commission under proposed new Sec.  39.19(c)(4)(xxvi). If so, 
the Commission further requests comment regarding how the term should 
be defined.
23. Requested Reporting--Sec.  39.19(c)(5)
    Regulation 39.19(c)(5)(i) through (iii) requires a DCO to provide 
to the Commission, upon request by the Commission, specific types of 
information. Paragraphs (c)(5)(i) through (iii) states that the 
information must be provided to the Commission ``in the format and 
manner specified, and within the time provided, by the Commission in 
the request.'' The Commission is proposing to amend Sec.  
39.19(c)(5)(i) through (iii) by deleting this language from each of the 
subparagraphs and adding introductory language to the paragraph that 
would require a DCO to provide the information specified in the 
paragraphs upon request by the Commission ``and within the time 
specified in the request.'' Regulation 39.19(b) already requires a DCO 
to provide the information in the format and manner specified by the 
Commission, so it is unnecessary to repeat that requirement in Sec.  
39.19(c)(5).
    The Commission is proposing to remove current Sec.  
39.19(c)(5)(iii), which requires a DCO to report to the Commission upon 
request end of day gross positions by each beneficial owner. This 
provision is no longer necessary given the proposed amendment to Sec.  
39.19(c)(1)(i), which requires a DCO to report margin, cash flow, and 
position information by individual customer account.

I. Public Information--Sec.  39.21

    Regulation 39.21 implements Core Principle L, which generally 
requires that a DCO provide to market participants sufficient 
information to enable the market participants to identify and evaluate 
accurately the risks and costs associated with using the services of 
the DCO. The Commission is proposing some minor changes to clarify the 
requirements of Sec.  39.21.
1. Public Disclosure and Publication of Information--Sec.  39.21(c) and 
(d)
    Regulation 39.21(c) requires a DCO to disclose publicly and to the 
Commission information concerning: (1) The terms and conditions of each 
contract, agreement, and transaction cleared and settled by the DCO; 
(2) each clearing and other fee that the DCO charges its clearing 
members; (3) the margin-setting methodology; (4) the size and 
composition of the financial resource package available in the event of 
a clearing member default; (5) daily settlement prices, volume, and 
open interest for each contract, agreement, or transaction cleared or 
settled by the DCO; (6) the DCO's rules and procedures for defaults in 
accordance with Sec.  39.16; and (7) any other matter that is relevant 
to participation in the clearing and settlement activities of the DCO. 
Regulation 39.21(d) requires the DCO to post all of this information, 
as well as the DCO's rulebook and a list of its current clearing 
members, on the DCO's website, unless otherwise permitted by the 
Commission.
    The Commission is proposing to remove Sec.  39.21(d) and 
incorporate its requirements into Sec.  39.21(c). The Commission 
believes that this will help clarify for DCOs what information must be 
made publicly available on their websites. The Commission has noted 
that some DCOs have made available certain items of information listed 
in current Sec.  39.21(c) only by posting their rulebooks on their 
websites. The Commission wishes to clarify that a DCO must make each of 
the items of information listed in proposed Sec.  39.21(c) available 
separately on the DCO's website and not just in the DCO's rulebook. 
This will assist members of the public in locating the relevant 
information and may facilitate greater uniformity across DCO websites.
2. Financial Resources--Sec.  39.21(c)(4)
    Regulation 39.21(c)(4) requires a DCO to disclose publicly the size 
and composition of its financial resource package available in the 
event of a clearing member default. The Commission has received 
questions concerning how often this information must be updated. 
Regulation 39.11(f)(1)(i)(A) requires a DCO to report this information 
to the Commission each fiscal quarter or at any time upon Commission 
request. The Commission believes it is reasonable to expect a DCO to 
update this information publicly with the same frequency. Therefore, 
the Commission is proposing to amend Sec.  39.21(c)(4) by adding the 
words ``updated as of the end of the most recent fiscal quarter or upon 
Commission request and posted concurrently with submission of the 
report to the Commission under Sec.  39.11(f)(1)(i)(A).''
3. Daily Settlement Prices, Volume, and Open Interest--Sec.  
39.21(c)(5)
    Regulation 39.21(c)(5) requires a DCO to disclose publicly daily 
settlement prices, volume, and open interest for each contract, 
agreement, or transaction cleared or settled by the DCO. Pursuant to 
current Sec.  39.21(d), this information must be made available to the 
public on the DCO's website no later than the business day following 
the day to which the information pertains.
    The Commission has received questions from DCOs about the 
appropriate scope and time period for disclosure of daily settlement 
prices. With respect to scope, Sec.  39.21(c)(5) clearly refers to 
daily settlement prices, volume, and open interest ``for each contract, 
agreement, or transaction cleared or settled'' by the DCO. The 
Commission therefore expects comprehensive disclosure of daily 
settlement prices, volume, and open interest for all contracts cleared 
or settled by the DCO, acting in its capacity as a DCO.\58\ However, 
the Commission is aware that certain DCOs may not be posting all of the 
required information on their websites. The Commission notes that 
current Sec.  39.21(d) requires posting of this information ``unless 
otherwise permitted by the Commission.'' Accordingly, any DCO that does 
not post all of the required information must seek relief from the 
Commission. In addition, although the plain language of Sec.  
39.21(c)(5) indicates that ``daily'' is intended to apply not only to 
settlement prices, but also to volume and open interest, the Commission 
hereby confirms that DCOs are expected to publicly disclose

[[Page 22244]]

volume and open interest, as well as settlement prices, on a daily 
basis in order to comply with Sec.  39.21(c)(5).
---------------------------------------------------------------------------

    \58\ Regulation 39.21(c)(5) does not require a DCO to post 
information concerning contracts, agreements, or transactions it 
clears outside of its capacity as a DCO. For example, a DCO that is 
also registered with the SEC as a securities clearing agency would 
not have to post information concerning security-based swaps in 
order to comply with this provision.
---------------------------------------------------------------------------

    Regulation 39.21(c)(5) does not specify a period of time the 
information must remain on the website. However, the Commission notes 
that certain DCOs make several days' worth of information available on 
their websites, and the Commission encourages others to do the same.
4. Swaps Required To Be Cleared--Sec.  39.21(c)(8)
    Regulation 50.3(a) requires that a DCO make publicly available on 
its website a list of all swaps that it will accept for clearing and 
identify which swaps on the list are required to be cleared under 
section 2(h)(1) of the CEA and part 50 of the Commission's regulations. 
The Commission is proposing to adopt Sec.  39.21(c)(8) to add a cross-
reference to Sec.  50.3(a).

J. Governance Fitness Standards, Conflicts of Interest, and Composition 
of Governing Boards--Sec. Sec.  39.24, 39.25, and 39.26

    The Dodd-Frank Act added three new core principles to the CEA 
relating to the governance of a DCO and the mitigation of potential 
conflicts of interest within a DCO. Core Principle O requires a DCO to 
establish governance arrangements that are transparent to fulfill 
public interest requirements and to permit the consideration of the 
views of owners and participants. Core Principle O also requires a DCO 
to establish and enforce appropriate fitness standards for directors, 
members of any disciplinary committee, members of the DCO, any other 
individual or entity with direct access to the settlement or clearing 
activities of the DCO, and any other party affiliated with any of the 
foregoing individuals or entities.
    Core Principle P requires a DCO to establish and enforce rules to 
minimize conflicts of interest in the decision-making process of the 
DCO and establish a process for resolving such conflicts of interest. 
Core Principle Q requires a DCO to ensure that the composition of its 
governing board or committee includes market participants.
    After the Dodd-Frank Act was enacted, the Commission proposed 
regulations that would have implemented Core Principles O, P, and 
Q.\59\ Those regulations have not been finalized, but the Commission 
did adopt other regulations that address some of the same issues that 
the proposed regulations would have addressed. For example, Sec.  
39.12(a)(1) requires a DCO to have participant eligibility criteria 
that permit fair and open access to the DCO; this addresses the concern 
that a DCO's existing clearing members might try to block potential 
members' access to the DCO for reasons that are not risk-based.\60\
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    \59\ See Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 
2010); Governance Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities; Additional Requirements Regarding the Mitigation of 
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011). The Commission is 
withdrawing these proposals as they relate to DCOs.
    \60\ Requirements for Derivatives Clearing Organizations, 
Designated Contract Markets, and Swap Execution Facilities Regarding 
the Mitigation of Conflicts of Interest, 75 FR at 63735-36.
---------------------------------------------------------------------------

    As previously noted, the Commission also adopted subpart C of part 
39 of the Commission's regulations.\61\ Included in subpart C is Sec.  
39.32, which sets forth the requirements for governance arrangements 
for SIDCOs and subpart C DCOs. In promulgating Sec.  39.32, the 
Commission noted that its requirements are consistent with Core 
Principles O, P, and Q.\62\
---------------------------------------------------------------------------

    \61\ See Derivatives Clearing Organizations and International 
Standards, 78 FR 72476 (Dec. 2, 2013).
    \62\ See id. at 72485-86.
---------------------------------------------------------------------------

    The Commission is proposing to remove Sec.  39.32 and adopt new 
Sec. Sec.  39.24, 39.25, and 39.26, which would incorporate all of the 
requirements of Sec.  39.32 and move them to subpart B, making them 
applicable to all DCOs, not just SIDCOs and subpart C DCOs. These 
governance requirements are designed to enhance risk management and 
controls by promoting transparency of governance arrangements and 
making sure that the interests of a DCO's clearing members and, where 
relevant, their customers are taken into account. The Commission 
believes these standards are appropriate for all DCOs, as most DCOs 
already meet such standards in order to be considered a QCCP, and 
incorporate best practices within the clearing industry. The Commission 
notes, however, that while the language that is proposed to be adopted 
in these sections is essentially the same as that which is included in 
Sec.  39.32, the provisions have been rearranged to correspond with the 
relevant core principle--Sec.  39.24 implements Core Principle O; Sec.  
39.25 implements Core Principle P; and Sec.  39.26 implements Core 
Principle Q.
    As noted above, Core Principle Q requires a DCO to ensure that the 
composition of its governing board or committee includes market 
participants. The Commission has become aware of issues in interpreting 
this requirement. In order to avoid ambiguity and provide greater 
clarity, the Commission is proposing to clarify certain aspects of this 
requirement. First, Commission staff has received questions as to 
whether the term ``governing'' should be read to apply only to the term 
``board,'' or if it should be read to apply to the term ``committee'' 
as well. Consistent with the title of Core Principle Q, ``Composition 
of Governing Boards,'' the Commission interprets this clause to refer 
to the governing body, whether a ``board'' or a ``committee,'' and does 
not interpret this clause to refer to the ``governing board'' or a 
``committee,'' which could be any type of committee. Therefore, the 
Commission is proposing to require market participation on the DCO's 
governing board or board-level committee, i.e., the group with the 
ultimate decision-making authority.
    Second, the Commission is proposing to define ``market 
participant'' in part 39 to mean any clearing member of the DCO or 
customer of such clearing member, or an employee, officer, or director 
of such an entity. A DCO's clearing members and their customers have a 
unique perspective that complements that of the other decision makers 
on the governing board. Customers clearing trades through an FCM in a 
particular market are exposed to the risks of that market, just as 
clearing members are, and therefore have similar interests in the 
decisions that govern the operations of the DCO. In general, clearing 
members and their customers understand risk, have market experience and 
perspective, and have knowledge of clearing and the markets for which 
the DCO clears. The Commission notes that an employee, officer, or 
director of a market participant serving on a DCO's governing board or 
committee is not necessarily required to have voting power, as such 
participation may impose duties that are in conflict with the employee, 
officer, or director's duties to the market participant. However, a 
non-voting market participant must otherwise be enabled by the DCO to 
participate fully in board meetings in terms of receiving information, 
providing input, and representing market participant views.

K. Legal Risk--Sec.  39.27

    Regulation 39.27(c) requires a DCO that provides clearing services 
outside the United States to identify and address conflict of law 
issues, specify a choice of law, be able to demonstrate the 
enforceability of its choice of law in relevant jurisdictions, and be 
able to demonstrate that its rules, procedures, and contracts are 
enforceable in all

[[Page 22245]]

relevant jurisdictions. In addition, Form DCO requires each applicant 
for DCO registration that provides or will provide clearing services 
outside the United States to provide a memorandum to the Commission 
that would, among other things, analyze the insolvency issues in the 
jurisdiction where the applicant is based.
    The Commission is proposing to amend Sec.  39.27(c) by adding 
paragraph (c)(3). Proposed Sec.  39.27(c)(3) would require a DCO that 
provides clearing services outside the United States to ensure on an 
ongoing basis that the memorandum required in Exhibit R of Form DCO is 
accurate and up to date and to submit an updated memorandum to the 
Commission promptly following all material changes to the analysis or 
content contained in the memorandum.

L. Fully-Collateralized Positions

    The Commission has oversight of a few registered DCOs that clear 
fully-collateralized positions. Fully-collateralized positions are 
designed to have on deposit a sufficient amount of funds, at all times, 
to cover the maximum potential loss that could be incurred in 
connection with a position. In the case of binary options, for example, 
the maximum risk is limited to the amount invested in the option. 
Because counterparties do not take a position in the underlying asset, 
movements in the underlying asset would not affect the payout received 
or loss incurred. Full collateralization prevents a DCO from being 
exposed to credit risk stemming from the inability of a clearing member 
or customer of a clearing member to meet a margin call or a call for 
additional capital. This limited exposure and full collateralization of 
that exposure renders certain provisions of part 39 inapplicable or 
unnecessary. As a result, the Division has granted relief from certain 
provisions of part 39 to DCOs that clear fully-collateralized 
positions.\63\ With this release, the Commission is proposing to codify 
this relief and to provide clarity to DCOs and future applicants for 
DCO registration regarding how the regulations in part 39 apply to DCOs 
that clear fully-collateralized positions.\64\
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    \63\ See CFTC Letter No. 14-04 (January 16, 2014) (granting 
exemptive relief to the North American Derivatives Exchange, Inc. 
(Nadex)); CFTC Letter No. 17-35 (July 24, 2017) (granting exemptive 
relief to LedgerX).
    \64\ The Division also issued interpretive guidance to Nadex for 
other provisions in part 39. CFTC Letter No. 14-05 (January 16, 
2014). The interpretive guidance may be relied on by third parties, 
and is not impacted by this proposed rulemaking.
---------------------------------------------------------------------------

    Fully-collateralized positions do not expose DCOs to many of the 
risks that traditionally margined products do. Therefore, the 
Commission is proposing to amend certain part 39 regulations to better 
accommodate fully-collateralized positions, where full-
collateralization addresses the risks that the regulations are meant to 
address.
    The proposed amendments are based on an assessment of how the DCO 
Core Principles and part 39 apply to fully-collateralized positions, as 
well as the relief previously granted to DCOs that clear such 
positions. The Commission believes the proposed amendments would not 
negatively impact prudent risk management at any DCO, regardless of the 
types of products cleared.
1. Definition of ``Fully-Collateralized Positions''--Sec.  39.2
    The Commission is proposing to define a ``fully-collateralized 
position'' as a contract cleared by a derivatives clearing organization 
that requires the derivatives clearing organization to hold, at all 
times, funds in the form of the required payment sufficient to cover 
the maximum possible loss that a counterparty could incur upon 
liquidation or expiration of the contract.
2. Computation of Financial Resources Requirement--Sec.  39.11(c)(1)
    Regulation 39.11(a)(1) requires a DCO to maintain financial 
resources sufficient to meet its financial obligations to its clearing 
members notwithstanding a default by the clearing member creating the 
largest financial exposure for the DCO in extreme but plausible market 
conditions. Regulation 39.11(c)(1) \65\ requires a DCO to perform 
monthly stress testing in order to make a reasonable calculation of the 
financial resources it would need in the event of such a default. 
Division staff has expressed the view that a DCO can satisfy the 
requirements of Sec.  39.11(a)(1) by clearing fully-collateralized 
positions.\66\ For fully-collateralized positions, a DCO holds its 
maximum possible loss on each contract at all times and does not face 
the risk of a clearing member default. The monthly stress tests 
required by Sec.  39.11(c)(1)(i) are therefore unnecessary for fully-
collateralized positions. Accordingly, the Commission is proposing to 
amend Sec.  39.11(c)(1)(i) to clarify that a DCO does not have to 
perform monthly stress tests on fully-collateralized positions.
---------------------------------------------------------------------------

    \65\ Revisions contained elsewhere in this proposed rulemaking 
would renumber this paragraph as Sec.  39.11(c)(1)(i).
    \66\ See CFTC Letter No. 14-05 (January 16, 2014) (providing 
interpretive guidance to Nadex).
---------------------------------------------------------------------------

3. Liquidity of Financial Resources--Sec.  39.11(e)(1)(ii)
    Regulation 39.11(e)(1)(ii) requires a DCO to have enough financial 
resources to meet the requirements of Sec.  39.11(a)(1) that are 
sufficiently liquid to enable the DCO to fulfill its obligations during 
a one-day settlement cycle. The specific amount of liquid resources a 
DCO must hold is based on the historical settlement pays of its 
clearing members. A DCO maintains sufficient liquidity for fully-
collateralized positions by requiring clearing members to post the full 
potential loss of a position in the form of the potential obligation. 
Requiring collateral to be in the form of the potential obligation 
eliminates the risk that the DCO will not have sufficient liquidity to 
meet its obligations and the need for daily mark-to-market settlements. 
Further, if a DCO were to complete the calculation required by Sec.  
39.11(e)(1)(ii), the amount would not change from day to day as the DCO 
operates a fully-collateralized model. As a result, the calculation 
required in Sec.  39.11(e)(1)(ii) is neither necessary or applicable 
for fully-collateralized positions. The Commission is therefore 
proposing to amend Sec.  39.11(e)(1)(iv) to clarify that DCOs do not 
need to include fully-collateralized positions in the calculation 
required thereunder.
4. Periodic Reporting of Participant Eligibility--Sec.  39.12(a)(5)(i) 
and (a)(5)(i)(B)
    Regulation 39.12(a)(5)(i) requires a DCO to require its clearing 
members to provide the DCO with periodic financial reports that allow 
the DCO to assess whether participation requirements are being met on 
an ongoing basis. Regulation 39.12(a)(5)(i)(B) \67\ requires a DCO to 
make these reports available to the Commission at the Commission's 
request.\68\ The Commission's participant eligibility requirements in 
Sec.  39.12(a) are intended to ensure that DCO participants maintain 
sufficient financial resources and operational capacity to meet the 
obligations arising from clearing at a DCO.\69\ Clearing members that 
only clear fully-collateralized positions present no

[[Page 22246]]

credit or default risk to the DCO because their full potential loss is 
already held by the DCO. Thus, periodic financial reports from non-FCM 
clearing members that only clear fully-collateralized positions do not 
provide any risk management benefit to DCOs. The Commission therefore 
is proposing to add new Sec.  39.12(a)(5)(v) to exclude non-FCM 
clearing members that only clear fully-collateralized positions from 
the financial reporting requirements in Sec.  39.12(a)(5)(i) and 
(a)(5)(i)(B).
---------------------------------------------------------------------------

    \67\ Revisions contained elsewhere in this proposed rulemaking 
would renumber Sec.  39.12(a)(5)(i)(B) as Sec.  39.12(a)(5)(iii).
    \68\ Regulation 39.12(a)(5)(i)(B) allows DCOs to either require 
clearing members to make the reports available to the Commission or 
to provide the reports to the Commission directly.
    \69\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR at 69352.
---------------------------------------------------------------------------

5. Large Trader Stress Tests--Sec.  39.13(h)(3)
    Regulation 39.13(h)(3) requires a DCO to conduct stress testing on 
a daily basis with respect to each large trader who poses significant 
risk to a clearing member or the DCO, and at least on a weekly basis 
with respect to each clearing member account, by house origin and by 
each customer origin. As discussed above, DCOs hold, at all times, the 
full potential loss of fully-collateralized positions cleared by the 
DCO, and a DCO does not face the risk of default from accounts that 
only hold fully-collateralized positions. As a result, such stress 
tests would not provide DCOs new information on accounts that only 
clear fully-collateralized positions. The Commission is therefore 
proposing to add new Sec.  39.13(h)(3)(iii) to exclude clearing member 
accounts that hold only fully-collateralized positions from the stress 
testing requirements in Sec.  39.13(h)(3)(i) and (ii).
6. Daily Reporting--Sec.  39.19(c)(1)(i)
    Regulation 39.19(c)(1)(i) requires a DCO to submit to the 
Commission a daily report containing information on initial margin, 
daily variation margin payments, other daily cash flows, and end-of-day 
positions. Because fully-collateralized positions do not pose a credit 
risk to the DCO or other participants, the Commission does not need 
daily reporting of this information with respect to fully-
collateralized positions. Therefore, the Commission is proposing to 
amend Sec.  39.19(c)(1)(i) such that the enumerated daily reporting is 
not required with respect to fully-collateralized positions.

V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs 
and DCOs That Elect To Be Subject to the Provisions

A. Financial Resources for SIDCOs and Subpart C DCOs--Sec.  39.33

    Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is 
systemically important in multiple jurisdictions, or that is involved 
in activities with a more complex risk profile, to maintain financial 
resources sufficient to enable it to meet its financial obligations to 
its clearing members notwithstanding a default by the two clearing 
members creating the largest combined loss in extreme but plausible 
market conditions. The Commission is proposing to amend Sec.  
39.33(a)(1) by replacing the phrase ``largest combined loss'' with 
``largest combined financial exposure'' in order to achieve consistency 
with the relevant provisions of Commission regulations and the CEA--
specifically, Sec.  39.11(a)(1) and section 5b(c)(2)(B) of the CEA 
regarding DCO financial resources requirements.
    Regulation 39.33(c)(1) requires a SIDCO or subpart C DCO to 
maintain eligible liquid resources sufficient to meet its obligations 
to perform settlements with a high degree of confidence under a wide 
range of stress scenarios that should include the default of the 
clearing member creating the largest aggregate liquidity obligation for 
the SIDCO or subpart C DCO. The Commission is proposing to amend Sec.  
39.33(c)(1) by adding the phrase ``in all relevant currencies'' to 
clarify that the ``largest aggregate liquidity obligation'' means the 
total amount of cash, in each relevant currency, that the defaulted 
clearing member would be required to pay to the DCO during the time it 
would take to liquidate or auction the defaulted clearing member's 
positions, as reasonably modeled by the DCO. When evaluating its 
largest aggregate liquidity obligation on a day-to-day basis over a 
multi-day period, a SIDCO or subpart C DCO may use its liquidity risk 
management model.
    Regulation 39.33(d) requires a SIDCO or a subpart C DCO to 
undertake due diligence to confirm that each of its liquidity providers 
has the capacity to perform its commitments to provide liquidity, and 
to regularly test its own procedures for accessing its liquidity 
resources. The Commission is proposing to additionally require a SIDCO 
with access to deposit accounts and related services at a Federal 
Reserve Bank to use such services where practical. This requirement 
would further enhance a SIDCO's financial integrity and management of 
liquidity risk.\70\
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    \70\ Under section 806(a) of the Dodd-Frank Act, 12 U.S.C. 
5465(a), the Board of Governors of the Federal Reserve System may 
authorize a Federal Reserve Bank to establish and maintain an 
account for a financial market utility (FMU), which includes a 
SIDCO. A SIDCO with access to accounts and services at a Federal 
Reserve Bank is required to comply with related rules published by 
the Board of Governors of the Federal Reserve System. See generally 
Financial Market Utilities, 78 FR 76973 (Dec. 20, 2013) (final rules 
adopted by the Board of Governors to govern accounts held by 
designated FMUs).
---------------------------------------------------------------------------

B. Risk Management for SIDCOs and Subpart C DCOs--Sec.  39.36

    Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct 
stress tests of its financial and liquidity resources and to regularly 
conduct sensitivity analyses of its margin models. The Commission is 
proposing to amend Sec.  39.36(a)(6) to clarify that a SIDCO or subpart 
C DCO that is subject to the minimum financial resources requirement 
set forth in Sec.  39.11(a)(1), rather than Sec.  39.33(a), should use 
the results of its stress tests to support compliance with that 
requirement.
    The Commission is also proposing to amend Sec.  39.36(b)(2)(ii) to 
replace the words ``produce accurate results'' with ``react 
appropriately'' to more accurately reflect that the purpose of a 
sensitivity analysis is to assess whether the margin model will react 
appropriately to changes of inputs, parameters, and assumptions. The 
Commission is also proposing to amend Sec.  39.36(d), which requires 
each SIDCO and subpart C DCO to ``regularly'' conduct an assessment of 
the theoretical and empirical properties of its margin model for all 
products it clears, to clarify that the assessment should be conducted 
``on at least an annual basis (or more frequently if there are material 
relevant market developments).''
    The Commission is also proposing to amend Sec.  39.36(e) by adding 
the heading ``[i]ndependent validation'' to the provision.

C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec.  39.37

    Regulation 39.37(a) and (b) requires a SIDCO or a subpart C DCO to 
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework 
\71\ and, in order to ensure the continued accuracy and usefulness of 
its responses, to review and update them at least every two years and 
following material changes to the SIDCO's or subpart C DCO's system or 
environment in which it operates. The Commission is proposing to amend 
Sec.  39.37(b) to additionally require that a SIDCO or a subpart C DCO 
provide notice to the Commission of any such updates to its responses 
following material changes to its system or environment no later than 
ten business days after the updates are made. Further, such notice 
would have

[[Page 22247]]

to be accompanied by a copy of the text of the responses, specifying 
the changes that were made to the latest version of the responses. 
Providing this notice would ensure that the Commission has access to 
the most current information available and would enable the Commission 
to identify changes since the last update to the disclosure responses.
---------------------------------------------------------------------------

    \71\ See CMPI-IOSCO, Principles for Financial Market 
Infrastructures: Disclosure Framework and Assessment Methodology 
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
---------------------------------------------------------------------------

    Regulation 39.37(c) requires a SIDCO or a subpart C DCO to 
disclose, to the public and to the Commission, relevant basic data on 
transaction volume and values. In adopting this provision, the 
Commission noted that this requirement was intended to be consistent 
with the then-forthcoming quantitative disclosure standards being 
developed by CPMI-IOSCO.\72\ On February 26, 2015, CPMI-IOSCO published 
the Public Quantitative Disclosure Standards for Central 
Counterparties.\73\ The Commission is proposing to amend Sec.  39.37(c) 
to explicitly state that a SIDCO or a subpart C DCO must disclose 
relevant basic data on transaction volume and values that are 
consistent with the standards set forth in the CPMI-IOSCO Public 
Quantitative Disclosure Standards for Central Counterparties.
---------------------------------------------------------------------------

    \72\ Derivatives Clearing Organizations and International 
Standards, 78 FR at 72493.
    \73\ See CPMI-IOSCO, Public Quantitative Disclosure Standards 
for Central Counterparties (Feb. 2015), available at https://www.bis.org/cpmi/publ/d125.pdf.
---------------------------------------------------------------------------

D. Corrections to Subpart C Regulations

    The Commission is proposing to amend Sec.  39.39(a)(2) to change 
the word ``or'' to ``of.''

VI. Amendments to Appendix A to Part 39--Form DCO

    To request registration as a DCO, Sec.  39.3(a)(2) requires an 
applicant to file a complete Form DCO, which includes a cover sheet, 
all applicable exhibits, and any supplemental materials, as provided in 
appendix A to part 39. The Commission uses Form DCO, which is comprised 
of a series of different exhibits that require the applicant to provide 
details of its operations, to determine whether the applicant 
demonstrates compliance with the Act and applicable Commission 
regulations. Applicants must also use Form DCO to amend a pending 
application or request an amended order of registration.
    The Commission is proposing to amend Form DCO to better describe 
the required exhibits in a manner that is consistent with the proposed 
amendments to the relevant regulations as described herein. For 
example, the Commission proposes to amend Exhibit A-11 to incorporate 
the more flexible CCO reporting structure that the Commission is 
proposing in Sec.  39.10(c)(1)(ii); add proposed Exhibit A-12 to 
describe a DCO's enterprise risk management program as consistent with 
newly proposed Sec.  39.10(d); amend Exhibit B-1 to incorporate 
proposed amendments to the Commission's financial resources 
requirements in proposed Sec.  39.11; and amend Exhibits O, P and Q to 
reflect the Commission's proposed amendments to Sec. Sec.  39.24, 
39.25, and 39.26 which would incorporate the specific governance 
arrangement, conflict of interest, and board composition requirement, 
which are currently only detailed in Sec.  39.32 for SIDCOs and subpart 
C DCOs.
    The Commission is also proposing to amend Form DCO to update the 
form to reflect the Commission's other rulemaking efforts. For example, 
the Commission proposes to amend Exhibit A-6 to update the reference 
from public director to independent director to remove terminology that 
was proposed but not ultimately adopted by the Commission for certain 
governance requirements, and amend Exhibit F-2 to include cross-
references to Commission regulations in part 22 which was adopted after 
the Commission adopted part 39.
    The Commission also proposes to amend Form DCO to eliminate 
information that has proven to be unnecessary to determine an 
applicant's compliance with the Act and applicable Commission 
regulations. For example, the Commission proposes to eliminate the 
requirement within Exhibit A-6 that an applicant provide contact 
information for each officer, director, governor, general partners, LLC 
managers, and all standing committee members. Lastly, the Commission 
also proposes to remove references within the Form DCO instructions to 
use the form to request an amended order of registration. The 
Commission intends for these proposed Form DCO changes to establish a 
clearer application process for applicants that also provides the 
Commission with improved information to determine compliance with the 
Act and Commission regulations.

VII. Amendments to Appendix B to Part 39--Subpart C Election Form

    The Commission is proposing to amend the subpart C Election Form to 
better reflect the requirements in subpart C of part 39 and to more 
closely align the format of the subpart C Election Form with Form DCO 
by specifying the information and/or documentation that must be 
provided by a DCO as part of its petition for subpart C election.
    Currently, unlike Form DCO, the subpart C Election Form references 
the corresponding regulations in subpart C, but does not specify the 
type or level of information that must be filed as an exhibit. In order 
to more closely align the format of the subpart C Election Form with 
Form DCO, the Commission is proposing to amend the subpart C Election 
Form to reflect the requirements of subpart C.

VIII. Amendments to Part 140--Organization, Functions, and Procedures 
of the Commission

    Regulation 140.94 includes delegation of authority from the 
Commission to the Director of the Division of Clearing and Risk. The 
Commission is proposing to revise Sec.  140.94 to conform to the 
changes to part 39 it is proposing in this release.

IX. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\74\ The 
regulations proposed by the Commission will affect only DCOs. The 
Commission has previously established certain definitions of ``small 
entities'' to be used by the Commission in evaluating the impact of its 
regulations on small entities in accordance with the RFA.\75\ The 
Commission has previously determined that DCOs are not small entities 
for the purpose of the RFA.\76\ Accordingly, the Chairman, on behalf of 
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \74\ 5 U.S.C. 601 et seq.
    \75\ 47 FR 18618 (Apr. 30, 1982).
    \76\ See 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \77\ provides that Federal 
agencies, including the Commission, may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a valid control number from the Office of Management 
and Budget (OMB). This proposed rulemaking contains reporting and 
recordkeeping requirements that are collections of information within 
the meaning of the PRA. If adopted,

[[Page 22248]]

responses to the collections of information would be required to obtain 
a benefit. This section addresses the impact that the proposal will 
have on existing information collection requirements associated with 
part 39.
---------------------------------------------------------------------------

    \77\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Additionally, the Commission is consolidating four collections of 
information relating to requirements under part 39.\78\ The 
requirements covered by all four existing collections will be combined 
in OMB control number 3038-0076, which will be renamed as 
``Requirements for Derivatives Clearing Organizations,'' and OMB 
control numbers 3038-0066, 3038-0069, and 3038-0081 will be cancelled. 
Changes to the existing information collection requirements as a result 
of this proposal are set forth below.
---------------------------------------------------------------------------

    \78\ The four collections are: OMB Control No. 3038-0066, 
Financial Resources Requirements for Derivatives Clearing 
Organizations; OMB Control No. 3038-0081, General Regulations and 
Derivatives Clearing Organizations; OMB Control No. 3038-0069, 
Information Management Requirements for Derivatives Clearing 
Organizations; and OMB Control No. 3038-0076, Risk Management 
Requirements for Derivatives Clearing Organizations.
---------------------------------------------------------------------------

1. Subpart A--General Requirements Applicable to DCOs
    Subpart A establishes the procedures and information required for 
applications for registration as a DCO, including submission of a 
completed Form DCO accompanied by all applicable exhibits. Form DCO is 
covered by OMB control number 3038-0076. Currently, collection 3038-
0076 reflects that there are 3 applicants for DCO registration annually 
and that it takes 400 hours to complete and submit the form, including 
all exhibits. The Commission is reducing the number of potential 
applicants for DCO registration to two annually, based on recent 
numbers of applications filed. The Commission is proposing to modify 
and update Form DCO to conform it to the proposed revisions to part 39.
    Additionally, the Commission is proposing to apply certain 
governance requirements applicable to SIDCOs and subpart C DCOs to all 
DCOs. This necessitates moving the corresponding burden hours from the 
subpart C Election Form to Form DCO. Specifically, 22 burden hours per 
respondent for the subpart C Election Form--Exhibits A through G, 
currently under OMB control number 3038-0081, would transfer to the 
Form DCO burden per respondent in OMB control number 3038-0076.
    The proposal would eliminate the requirement for DCOs to use Form 
DCO to request an amended order of DCO registration. The Commission 
estimates the burden hours per respondent would decrease by one hour 
due to the proposed change to Sec.  39.3(a)(2) that would no longer 
require a DCO seeking to amend its order of registration to submit Form 
DCO. The new aggregate proposed estimate for Form DCO is as follows:
Form DCO--Sec.  39.3(a)(2)
    Estimated number of respondents: 2.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 421.
    Estimated gross annual reporting burden: 842.
    The Commission also is proposing to amend certain existing 
provisions of Sec.  39.3 regarding requests for extension of the review 
of a DCO application, vacation of a DCO's registration, and transfer of 
positions. The Commission is proposing to adopt new Sec.  39.3(a)(6), 
which would permit the Commission to extend the 180-day review period 
for DCO applications specified in Sec.  39.3(a)(1) for any period of 
time to which the applicant agrees in writing. Although this is not a 
new practice, it was not previously accounted for separately in this 
information collection. The Commission is estimating that there would 
be two requests for extension of the DCO application per year, one per 
respondent, and that it will take one hour per report. The new 
aggregate proposed estimate for the agreement in writing to extend the 
application review period pursuant to Sec.  39.3(a)(6) is as follows:
    Estimated number of respondents: 2.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 1.
    Estimated gross annual reporting burden: 2.
    The Commission is proposing to amend Sec.  39.3(e) to codify 
statutory requirements regarding vacation of registration. The proposed 
changes would specify information that a DCO must include in its 
request to vacate, and require a DCO to continue to maintain its books 
and records after its registration has been vacated for the requisite 
statutory and regulatory retention periods. The Commission estimates 
that there would be one request to vacate every three years and that it 
would take three hours per report. The annual aggregate burden for the 
request to vacate requirement has been divided to reflect the estimate 
of one request to vacate a DCO registration pursuant to Sec.  
39.3(e)(1) every three years as follows:
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 0.33.
    Average number of hours per report: 1.
    Estimated gross annual reporting burden: 1.
    For recordkeeping by a DCO that has requested to vacate its 
registration, the Commission is adding this recordkeeping burden to OMB 
control number 3038-0076, which currently includes 16 responses and 50 
burden hours for the recordkeeping requirement of registered DCOs. The 
Commission is also transferring the 100 recordkeeping burden hours 
currently contained in OMB control number 3038-0069 to OMB control 
number 3038-0076. The burden for the request to vacate requirement has 
been divided to reflect the estimate of one record of the request to 
vacate a DCO registration pursuant to Sec.  39.3(e)(1) every three 
years. The combined annual aggregate recordkeeping burden estimate for 
subparts A and B of part 39 under OMB control number 3038-0076 is as 
follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 150.
    Estimated number of respondents-request to vacate: 1.
    Estimated number of reports per respondent-request to vacate: 0.33.
    Average number of hours per report-request to vacate: 1.
    Estimated gross annual recordkeeping burden: 2,401.\79\
---------------------------------------------------------------------------

    \79\ The total annual recordkeeping burden estimate reflects the 
combined figures for 16 registered DCOs with an annual burden of one 
response and 150 hours per response (16 x 1 x 150 = 2,400), and one 
vacated DCO registration every three years with an annual burden of 
one hour.
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    The Commission is proposing changes to Sec.  39.3(f), to be 
renumbered as Sec.  39.3(g), to simplify the requirements for 
requesting a transfer of open interest. The rule submission filing is 
covered by OMB control number 3038-0093, which reflects that there are 
50 reports annually and that it takes two hours per response. The 
Commission is of the view that to the extent that the transfer of open 
interest request would be submitted as part of a new rule or rule 
amendment filing pursuant to Sec.  40.5, the proposed change is already 
covered by OMB control number 3038-0093 and there is no change in the 
burden estimates.

[[Page 22249]]

2. Subpart B--Requirements for Compliance With Core Principles
a. CCO Annual Reporting Requirements--Sec.  39.10(c)
    Currently, Sec.  39.10(c)(3) requires the CCO of a DCO to prepare, 
and to submit to the Commission and the DCO's board of directors, an 
annual compliance report containing specified information regarding the 
DCO's compliance with the core principles and Commission regulations. 
The burden for CCO annual reports, which is currently covered by OMB 
control number 3038-0081, is being moved to OMB control number 3038-
0076. OMB control number 3038-0081 reflects that there are 12 
respondents that submit CCO annual reports annually and that it takes 
80 hours to complete and submit the report, and 960 hours in the 
aggregate. The number of respondents is being updated to 16 to reflect 
the current number of registered DCOs. The Commission is proposing to 
allow a DCO to incorporate by reference certain sections of prior 
annual compliance reports. Specifically, if the sections of the CCO 
annual report that describe the DCO's compliance policies and 
procedures have not materially changed, the current report may 
reference a prior year's report, provided that the referenced report 
was filed within the prior five years. The Commission estimates that 
this change should decrease the burden of preparing the CCO annual 
report by ten hours per respondent, and 160 hours in aggregate, by not 
requiring the report to repeat potentially lengthy descriptions of 
policies and procedures that have already been adequately described in 
a CCO annual report previously submitted to the Commission.
    The Commission is proposing to specify that the CCO annual report 
must identify, by name, rule number, or other identifier, the policies 
and procedures intended to comply with each core principle and 
applicable regulation. The Commission estimates the proposed change 
would add two hours to the burden of preparing each report, and 32 
hours in the aggregate. Lastly, the Commission is proposing to amend 
Sec.  39.10(c)(4) to require that the CCO annual report describe the 
process by which the report is submitted to the DCO's board or senior 
officer. This requirement would require DCOs to memorialize in the 
report a process they are already required to follow. Nonetheless, the 
Commission anticipates an increase of one hour in the burden for each 
report, and 16 hours in the aggregate due to this proposed change. 
Overall, the Commission estimates that the net impact of these 
increases and reductions to the CCO annual report burden due to the 
proposed changes is expected to be a decrease of seven hours per 
respondent in the existing information collection burden associated 
with the CCO annual report.\80\ The aggregate proposed estimate for the 
CCO annual report is as follows:
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    \80\ The existing burden estimate for the CCO annual report is 
80 hours per response. For the new estimate, the Commission is 
subtracting ten hours for the proposal not to require restatement of 
information that has not changed from the prior report, adding two 
hours for the proposal to require references to rules and policies, 
and one hour for the proposal to require that the report include 
documentation of the process of providing the report to the board, 
for a net burden per respondent of 73 hours. The recordkeeping 
burden is covered by OMB Control No. 3038-0076 and it is not 
affected by the proposal.
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    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 73.
    Estimated gross annual reporting burden: 1,168.
b. Cross-Margining Programs
    The Commission is proposing to add Sec.  39.13(i), which would set 
forth the procedure for DCOs to submit information related to their 
proposed cross-margining programs with other DCOs (or other clearing 
organizations). Proposed Sec.  39.13(i) would specify the information 
that a DCO would need to provide to the Commission regarding its cross-
margining program and require that the DCO submit this information as 
part of a rule filing submitted for Commission approval pursuant to 
Sec.  40.5. The rule submission filing is covered by OMB control number 
3038-0093, which reflects that there are 50 reports annually and that 
it takes 2 hours per response. The Commission is of the view that to 
the extent that the cross-margining program would be submitted as part 
of a new rule or rule amendment filing pursuant to Sec.  40.5, the 
proposed changes is already covered by OMB control number 3038-0093 and 
there is no change in the burden estimates.
c. Financial Resources Reporting
i. Annual Financial Reports
    Existing Sec.  39.11(f) requires DCOs to provide to the Commission 
quarterly reports of their financial resources, and Sec.  39.19(c)(3) 
requires DCOs to prepare and submit audited annual financial 
statements. The Commission is proposing to add Sec.  39.11(f)(2), which 
would incorporate in Sec.  39.11 the annual reporting requirement that 
currently exists in Sec.  39.19(c)(3). This change simply moves the 
existing requirement to a different location, and does not alter the 
existing information collection burden associated with this 
requirement. Accordingly, the burden for annual financial reports is 
being moved from OMB control number 3038-0069 to OMB control number 
3038-0076, and the burden for quarterly financial reports is being 
moved from OMB control number 3038-0066 to OMB control number 3038-
0076. The Commission is cancelling OMB control numbers 3038-0069 and 
3038-0066.
    The Commission also is proposing to require in Sec.  39.11(f)(2) 
that, concurrently with filing the required annual financial report, a 
DCO also provide: (1) A reconciliation, including appropriate 
explanations, of its balance sheet in the certified annual financial 
statements with the DCO's most recent quarterly report when material 
differences exist or, if no material differences exist, a statement so 
indicating, and (2) such further information as may be necessary to 
make the required statements not misleading. The Commission estimates 
that the proposed change would add an additional 20 hours per report, 
and 320 hours in the aggregate, to the current burden of 2,606 hours 
per respondent, and 41,696 hours, in OMB control number 3038-0069, 
which as noted above, is being moved to OMB control number 3038-0076.
    Finally, the Commission is proposing in Sec.  39.11(f)(2)(i) that 
the annual report be required to identify the DCO's own capital 
allocated to the DCO's compliance with Sec.  39.11(a)(1), and also 
identify each of the DCO's financial resources allocated to the DCO's 
compliance with Sec.  39.11(a)(2). The Commission estimates that the 
proposed change would add an additional 14 hours per report and 224 
hours in the aggregate to the current burden of 2,606 hours per 
respondent, and 41,696 hours, in OMB control number 3038-0069, which as 
noted above, is being moved to OMB control number 3038-0076.
    The Commission estimates that the aggregate result of these changes 
will be to increase the information collection burden associated with 
annual financial reports from 2,606 hours to 2,640 hours for each DCO. 
The revised estimated aggregate burden for the audited annual financial 
statements is as follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 2,640.
    Estimated gross annual reporting burden: 42,240.

[[Page 22250]]

ii. Quarterly Financial Reports
    The Commission is proposing to remove from Sec.  39.11(f)(3) the 
requirement that certain documentation be filed quarterly; instead, 
DCOs would only need to include the information in their first 
quarterly report submission and upon any subsequent change, for an 
expected reduction of three hours per report. Proposed Sec.  
39.11(f)(1)(v) would require a DCO to identify in its quarterly report 
the financial resources allocated to meeting its obligations under 
Sec.  39.11(a)(1) and (2), with an expected increase of one hour per 
report. The Commission has adjusted the existing burden hours for 
quarterly reporting to reflect these proposed changes, which result in 
an overall reduction in burden of two hours per report from the total 
estimated burden reflected in OMB control number 3038-0066. The 
estimated aggregate burden for the quarterly reports, as amended by the 
proposal is as follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 8.
    Estimated gross annual reporting burden: 512.
    The Commission is also proposing to amend Sec.  39.11(f)(1)(ii), 
which requires a DCO to file with the Commission a financial statement 
of the DCO or of its parent company. The Commission is proposing to 
amend Sec.  39.11(f)(1)(ii) to require that the financial statement 
provided be that of the DCO and not the parent company. The Commission 
is further proposing to amend the periodic financial reporting 
requirements in Sec.  39.11(f)(1)(ii) and (f)(2)(i) to permit quarterly 
and annual financial statements to be prepared in accordance with U.S. 
GAAP for DCOs incorporated or organized under U.S. law and in 
accordance with either U.S. GAAP or IFRS for DCOs incorporated or 
organized under the laws of any foreign country. These changes are not 
expected to affect the burden.
d. Daily Reporting
    The Commission is proposing to amend Sec.  39.19(c)(1)(i)(A)-(C), 
which requires a DCO to report margin, cash flow, and position 
information by house origin and separately by customer origin, to 
report this information by individual customer account as well. The 
Commission is also proposing to amend Sec.  39.19(c)(1)(i)(D) to 
specify that, with respect to end-of-day position information, DCOs 
must report both unadjusted and risk-adjusted position information. The 
burden associated with these proposed changes is anticipated to result 
in an increase from 0.1 to 0.5 hours per report, and 2,000 in the 
aggregate. The burden increase for daily financial reports is being 
moved from OMB control number 3038-0069 to OMB control number 3038-
0076.
    Separately, the Commission is proposing changes to Sec.  
39.19(c)(1)(i) that would codify relief previously granted to fully-
collateralized DCOs that would reduce their daily reporting burden by 
not requiring information on initial margin, daily variation margin 
payments, other daily cash flows, and end-of-day positions. The 
proposed change would reduce the burden for fully-collateralized DCOs, 
but would not affect the burden for the majority of DCOs that are 
subject to daily reporting requirements. The revised aggregate burden 
estimate for daily reporting being transferred to OMB control number 
3038-0076 is as follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 250.
    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 2,000.
    The Commission is proposing amendments to Sec.  39.13(g)(8)(i)(B) 
to require a DCO to have rules requiring its clearing members to report 
customer information about futures (as well as swaps) to DCOs. This is 
a new information collection that is not covered by an existing OMB 
control number. The burden applicable to clearing members is estimated 
as follows:
    Estimated number of respondents: 64.
    Estimated number of reports per respondent: 250.
    Average number of hours per report: 0.2.
    Estimated gross annual reporting burden: 3,200.
e. Event-Specific Reporting
    Regulations 39.18(g) and (h) require a DCO to provide notice 
regarding certain exceptional events or planned changes related to a 
DCO's automated systems. These notice requirements are incorporated by 
reference in Sec.  39.19(c)(4). Regulation 39.19(c)(4) also requires a 
DCO to notify the Commission of the occurrence of other specified 
events; for example, a decrease in financial resources or the default 
of a clearing member. The information collection burden associated with 
these notices required under Sec.  39.19(c)(4) is currently addressed 
by OMB Control No. 3038-0069, but is being moved to OMB control number 
3038-0076 and consolidated with the burden in OMB control number 3038-
0076 that is currently associated with Sec.  39.18(g) and (h). In 
addition, the Commission is proposing to add to Sec.  39.19(c)(4) 
several events for which DCOs will be required to provide notification 
if such events occur.
    The Commission is also proposing to amend Sec.  39.16(c)(2)(ii) to 
require that a DCO provide immediate public notice of a declaration of 
default on its website. The estimated burden of proposed Sec.  
39.16(c)(2)(ii) is included in the estimate for event-specific 
reporting because it would occur concurrently with the requirement 
under Sec.  39.19(c)(4)(vii) that a DCO provide immediate notice to the 
Commission regarding the default of a clearing member.
    The burden associated with these proposed changes pursuant to Sec.  
39.19(c)(4) is anticipated to result in an increase in the number of 
reports by DCO per year on average, from four to 20, and a reduction in 
the hour burden per response, which was previously overstated, from six 
to 0.5 hours, because a DCO is required to provide a brief notice with 
only the pertinent details of the incident. The aggregate revised 
burden estimate of Sec.  39.19(c)(4) being transferred to OMB control 
number 3038-0076 is as follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 20.
    Average number of hours per report: 0.5.
    Estimated gross annual reporting burden: 160.
f. Public Information
    The Commission is proposing to revise Sec.  39.21 to clarify that 
information regarding the financial resource package available in the 
event of a clearing member default, which a DCO is required to post on 
its website pursuant to Sec.  39.21, should be updated at least 
quarterly, consistent with the requirement in Sec.  39.11(f)(1)(i)(A) 
to report this information to the Commission each fiscal quarter or at 
any time upon Commission request. The Commission is also clarifying 
that other information specified in Sec.  39.21 must be disclosed 
separately on the DCO's website, and not provided solely in the DCO's 
posted rulebook. This is a new information collection that is not 
covered by an existing OMB control number. The proposed changes are 
estimated to add an average of two hours per response, and eight hours 
per respondent annually (4 quarterly reports x 2 hours per report) to 
OMB control number 3038-0076, for an aggregate estimated burden as 
follows:

[[Page 22251]]

    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 2.
    Estimated gross annual reporting burden: 128.
g. Governance
    As noted above, the Commission is proposing to incorporate 
governance provisions from subpart C, which only applies to a limited 
subset of DCOs, into subpart B, which is applicable to all DCOs. 
Therefore, the information collection burden currently associated with 
the governance standards of Sec.  39.32, which results from required 
disclosure of major board decisions and governance arrangements, has 
been reallocated to Sec.  39.24. The burden associated with subpart C 
governance provisions, which is currently covered by OMB control number 
3038-0081, is being moved to OMB control number 3038-0076. The 
aggregate burden of these requirements would increase because they will 
be applicable to all registered DCOs. The new aggregate burden estimate 
for proposed Sec.  39.24 that is associated with the required ongoing 
disclosure of major board decisions and governance arrangements by 
registered DCOs, including DCOs that are not currently subject to 
subpart C, is estimated as follows:
    Estimated number of respondents: 16.
    Estimated number of reports per respondent: 6.
    Average number of hours per report: 3.
    Estimated gross annual reporting burden: 288.
h. Legal Risk
    Proposed changes to Sec.  39.27 would require a DCO that provides 
clearing services outside the United States to ensure that the legal 
opinion that a DCO must obtain to provide those services is accurate 
and up to date. The new subsection also requires the DCO to submit an 
updated legal memorandum to the Commission following all material 
changes to the analysis or content contained in the memorandum. This 
requirement would apply only to DCOs offering clearing services outside 
the U.S. This is a new information collection that is not covered by an 
existing OMB control number. The Commission expects that circumstances 
necessitating submission of an updated legal memorandum will occur 
infrequently, not more than once every three years, and has estimated 
the aggregate burden as follows:
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 0.33.
    Average number of hours per report: 20.
    Estimated gross annual reporting burden: 6.6.
    3. Subpart C--Provisions Applicable to SIDCOs and DCOs That Elect 
To Be Subject to the Provisions of Subpart C
    Because the Commission is proposing to remove and reserve Sec.  
39.32 and Exhibit B of the subpart C Election Form and to move the 
governance requirements to Form DCO and Sec.  39.24, the corresponding 
information collection burden under Sec.  39.32, currently covered by 
OMB control number 3038-0081 would be eliminated and the burden under 
the subpart C Election Form would be reduced. Further, in consolidating 
the burden for subpart C, currently in OMB control number 3038-0081, 
with OMB control number 3038-0076, the Commission has reassessed the 
burden for the subpart C Election Form, and is adjusting certain burden 
hour estimates and numbers of respondents. Specifically, the Commission 
is reducing the number of burden hours estimated for the certification 
portion of the subpart C Election Form from 25 hours to 2 hours, 
because the prior estimate overstated the burden necessary to prepare 
the one-page certification. The burden that is currently estimated 
separately for the certifications, exhibits, and supplements/amendments 
to the subpart C Election Form have been combined because a DCO must 
provide all the required information in order to submit a complete 
subpart C Election Form.\81\
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    \81\ The current burden for the subpart C Election Form exhibits 
is 155 hours per response; 22 of these hours are being moved to the 
Form DCO burden as discussed in the Form DCO section above, leaving 
133 hours. Also, the Commission is reducing the burden currently 
attributed to amendments to the subpart C Election Form and 
consolidating it with the burden for supplemental information 
because in practice, DCOs have not frequently filed amendments. 
Consolidating the certification (2 hours), exhibits (133 hours), and 
supplemental or amended information (45 hours) results in a burden 
of 180 hours.
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    Additionally, the Commission is proposing to update the estimated 
numbers of respondents for subpart C to reflect the current number of 
SIDCOs and subpart C DCOs, and a reduction, from five to one, in the 
anticipated number of DCOs newly electing to be subject to subpart C. 
The Commission is also updating the number of responses for the 
rescission notices that must be provided to clearing members based on 
an average of the current number of clearing members at subpart C DCOs. 
The Commission also is combining burden estimates that previously were 
estimated separately for SIDCOs only and for all subpart C DCOs; that 
distinction was made in the initial implementation of subpart C but is 
no longer necessary since the subpart C rules have been in place for 
several years. The revised estimated aggregate reporting burden related 
to the subpart C Election Form, notices and disclosure being 
transferred to OMB control number 3038-0076 is as follows:
Subpart C Election Form
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 180.
    Estimated gross annual reporting burden: 180.
Subpart C Withdrawal Notice
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 2.
    Estimated gross annual reporting burden: 2.
Subpart C Rescission Notice
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 16.
    Average number of hours per report: 3.
    Estimated gross annual reporting burden: 48.
PFMI Disclosures
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 200.
    Estimated gross annual reporting burden: 200.
Quantitative Disclosures
    Estimated number of respondents: 1.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 80.
    Estimated gross annual reporting burden: 80.
    Additionally, the Commission is proposing to add to Sec.  39.37 a 
notification requirement regarding changes to the PFMI disclosure 
framework for SIDCOs and subpart C DCOs, which is expected to increase, 
by one hour, the existing information collection burden of 80 hours per 
response. The aggregate estimated burden for Sec.  39.37 is stated 
below:
Subpart C Disclosure Framework Requirements--Sec.  39.37
    Estimated number of respondents: 9.

[[Page 22252]]

    Estimated number of reports per respondent: 1.
    Average number of hours per report: 81.
    Estimated gross annual reporting burden: 729.
    Because the Commission is moving all of the burden estimates for 
subpart C from OMB control number 3038-0081 to OMB control number 3038-
0076 and cancelling information collection 3038-0081, the existing 
burden estimates for Sec. Sec.  39.33, 39.36, 39.38, and 39.39, and 
certain disclosures under Sec.  39.37, as updated to reflect the 
current number of SIDCOs and subpart C DCOs, are restated below. In 
addition, for the quantitative disclosures required under Sec.  39.37, 
which may be updated as frequently as quarterly, the Commission has 
updated the number of reports per respondent from one to four annually, 
and has distributed the existing 35 burden hours among the four reports 
(35/4 = 8.75, rounded to 9). The updated subpart C reporting burden 
estimates for the changes to subpart C--Provisions is as follows:
Subpart C Financial and Liquidity Resource Documentation--Sec.  39.33
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 120.
    Estimated gross annual reporting burden: 1080.
Subpart C Stress Test Results--Sec.  39.36
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 16.
    Average number of hours per report: 14.
    Estimated gross annual reporting burden: 2016.
Subpart C Quantitative Disclosures--Sec.  39.37
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 4.
    Average number of hours per report: 9.
    Estimated gross annual reporting burden: 324.
Subpart C Transaction, Segregation and Portability Disclosures--Sec.  
39.37
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 35.
    Estimated gross annual reporting burden: 315.
Subpart C Efficiency and Effectiveness Review--Sec.  39.38
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 3.
    Estimated gross annual reporting burden: 27.
Subpart C Recovery and Wind-down Plan--Sec.  39.39
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 1.
    Average number of hours per report: 480.
    Estimated gross annual reporting burden: 4,320.
    With respect to the subpart C recordkeeping burden that the 
Commission is moving from OMB control number 3038-0081 to OMB control 
number 3038-0076, the Commission also has combined the burden estimates 
for financial and liquidity resources, and liquidity resource due 
diligence and testing because these requirements apply to the same set 
of respondents. As noted above, the general recordkeeping requirements 
that were previously estimated separately for SIDCOs and all subpart C 
DCOs also have been combined. The updated subpart C recordkeeping 
burden estimates are restated below:
Subpart C Recordkeeping--General
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 110.
    Average number of hours per report: 10.
    Estimated gross annual recordkeeping burden: 9,900.
Subpart C Recordkeeping--Financial and Liquidity Resources, Liquidity 
Resource Due Diligence and Testing
    Estimated number of respondents: 9.
    Estimated number of reports per respondent: 8.
    Average number of hours per report: 10.
    Estimated gross annual recordkeeping burden: 720.
Request for Comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. The Commission will consider public 
comments on this proposed collection of information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final 
rulemaking, and please refer to the ADDRESSES section of this 
rulemaking for instructions on submitting comments to the Commission. 
OMB is required to make a decision concerning the proposed information 
collection requirements between 30 and 60 days after publication of 
this release in the Federal Register. Therefore, a comment to OMB is 
best assured of receiving full consideration if OMB receives it within 
30 calendar days of publication of this release. Nothing in the 
foregoing affects the deadline enumerated above for public comment to 
the Commission on the proposed rules.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the

[[Page 22253]]

CEA or issuing certain orders.\82\ Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors (collectively referred to herein as section 15(a) 
factors). The Commission has not identified any impact that the 
proposed changes to part 39 would have on price discovery. The impact 
the proposed changes to part 39 would have on the other section 15(a) 
factors is considered below.
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    \82\ 7 U.S.C. 19(a).
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    The Commission recognizes that the proposed rules may impose costs. 
The Commission has endeavored to assess the expected costs and benefits 
of the proposed rulemaking in quantitative terms, including PRA-related 
costs, where possible. In situations where the Commission is unable to 
quantify the costs and benefits, the Commission identifies and 
considers the costs and benefits of the applicable proposed rules in 
qualitative terms. The lack of data and information to estimate those 
costs is attributable in part to the nature of the proposed rules. 
Additionally, the initial and recurring compliance costs for any 
particular DCO will depend on the size, existing infrastructure, level 
of clearing activity, practices, and cost structure of the DCO.
    The Commission notes that this consideration is based on its 
understanding that centralized clearing activity functions 
internationally with (i) clearing activity that involves U.S. firms 
occurring across different international jurisdictions; (ii) some 
entities organized outside the U.S. that are prospective or current 
Commission registrants; and (iii) some entities typically operating 
both within and outside of the U.S. who follow substantially similar 
business practices wherever located. Where the Commission does not 
specifically refer to matters of location, its discussion of costs and 
benefits refers to the effects of the proposed rules on all activity 
subject to it, whether by virtue of the activity's physical location in 
the United States or by virtue of the activity's connection with or 
effect on U.S. commerce under section 2(i) of the CEA. In particular, 
the Commission notes that some DCOs subject to the proposed rules are 
located outside of the United States.
    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs and benefits not discussed herein; the 
potential costs and benefits of the alternatives discussed herein; data 
and any other information to assist or otherwise inform the 
Commission's ability to quantify or qualitatively describe the costs 
and benefits of the proposed rules; and substantiating data, 
statistics, and any other information to support positions posited by 
commenters with respect to the Commission's discussion. The Commission 
welcomes comment on such costs, particularly from existing DCOs that 
can provide quantitative cost data based on their respective 
experiences. Commenters may also suggest other alternatives to the 
proposed approach.
2. Baseline
    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking are: (1) The DCO Core Principles 
set forth in section 5b(c)(2) of the CEA; (2) the general provisions 
applicable to DCOs under subparts A and B of part 39 of the 
Commission's regulations; (3) the Commission's regulations in subpart C 
of part 39, which establish additional standards for compliance with 
the core principles for those DCOs that are designated as SIDCOs or 
have elected to opt-in to the subpart C requirements in order to 
achieve status as a QCCP; (4) Form DCO in appendix A to part 39; (5) 
subpart C Election Form in appendix B to part 39; and (6) Sec. Sec.  
1.20(d) and 140.94.
    The Commission notes that some of the proposed rules would codify 
existing no-action relief and other guidance issued by Commission 
staff. To the extent that market participants have relied upon such 
relief or staff guidance, the actual costs and benefits of the proposed 
rules, as discussed in this section of the proposal, may not be as 
significant.
3. Written Acknowledgment From Depositories--Sec.  1.20
a. Benefits
    Regulation 1.20(d)(1) requires an FCM to obtain a written 
acknowledgment from each depository with which the FCM deposits futures 
customer funds. The regulation provides that an FCM is not required to 
obtain a written acknowledgment from a DCO that has adopted rules 
providing for the segregation of customer funds, but other provisions 
of Sec.  1.20(d) seem to suggest that a DCO must provide the written 
acknowledgment regardless. The Commission is proposing to amend Sec.  
1.20(d) to clarify the Commission's intent that the requirements listed 
in Sec.  1.20(d)(3) through (6) do not apply to a DCO, or to an FCM 
that clears through that DCO, if the DCO has adopted rules that provide 
for the segregation of customer funds. The Commission believes this 
will benefit FCMs and DCOs by reducing uncertainty as to when an FCM 
must obtain a written acknowledgment from a DCO.
b. Costs
    The Commission does not believe the proposed amendment would impose 
any additional costs on DCOs or FCMs, as it is clarifying the 
circumstances under which an acknowledgment letter would not be 
required.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(B) of the CEA, the Commission believes that the proposed 
amendments to Sec.  1.20(d) would not negatively impact the protection 
of market participants and the public, including DCOs' clearing members 
and their customers, as the proposed amendment merely clarifies the 
instances in which a DCO, or an FCM that clears through that DCO, would 
not need to file an acknowledgment letter because the DCO has adopted 
rules that provide for the segregation of customer funds. The 
Commission believes that the proposed amendment to Sec.  1.20(d) will 
result in an incremental increase in efficiency for FCMs that follows 
from reducing any previous uncertainty regarding when they must obtain 
an acknowledgement letter. The Commission has considered the other 
section 15(a) factors and believes that they are not implicated by the 
proposed amendment.
4. Definitions--Sec.  39.2
    Regulation 39.2 sets forth definitions applicable to terms used in 
part 39 of the Commission's regulations. The Commission is proposing 
amendments to the definition of ``business day,'' ``customer,'' 
``customer account or customer origin,'' and ``key personnel'' in Sec.  
39.2 to maintain consistency with terms defined elsewhere in Commission 
regulations and to provide clarity with respect to the use of these 
terms. The Commission is also adding new definitions for ``enterprise 
risk

[[Page 22254]]

management'' and ``fully-collateralized position'' to correspond with 
amendments that the Commission is proposing elsewhere in part 39.
a. Benefits
    The Commission believes the proposed amendments to Sec.  39.2 would 
benefit DCOs by clarifying existing part 39 requirements, such as what 
constitutes a Federal holiday for purposes of applying the definition 
of ``business day.'' The Commission believes the newly proposed 
definitions in Sec.  39.2 for ``enterprise risk management'' and 
``fully-collateralized positions'' are necessary to understanding the 
proposed rules for an enterprise risk management framework in proposed 
Sec.  39.10(d) and proposed exceptions from several requirements for 
fully-collateralized positions throughout part 39. The proposed 
amendments to the definitions of ``customer'' and ``customer account or 
customer origin'' would also help to avoid conflicts with similar terms 
defined in Sec.  1.3.
b. Costs
    The Commission does not believe the proposed new and amended 
definitions would impose additional costs on DCOs, as they are not 
imposing additional requirements, but rather defining terms that are 
used in other provisions.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission evaluated the 
costs and benefits in light of the specific considerations identified 
in section 15(a) of the CEA. The Commission believes that DCOs may 
experience a modest increase in efficiency as a result of the proposed 
amendments. In consideration of section 15(a)(2)(B) of the CEA, the 
Commission believes that, to the extent that the amended definitions 
provide clarity, reduce any previous uncertainty, or help to avoid 
conflicts with similar terms that are defined in different sections, 
these effects, individually and in aggregate, may yield increased 
efficiency. For example, the Commission believes the proposed 
amendments to the definition of ``business day'' in Sec.  39.2 will 
better enable DCOs, particularly those located outside of the United 
States, to easily identify Federal holidays as it relates to their 
compliance with applicable reporting requirements under part 39. The 
proposed amendments to Sec.  39.2 would also provide foreign DCOs with 
greater clarity by excluding ``foreign holidays'' from the definition 
of ``business day,'' thereby eliminating the requirement to report to 
the Commission on a non-trading day. After considering the other 
section 15(a) factors, the Commission believes they are not implicated 
by the proposed amendments.
5. Procedures for Registration--Sec.  39.3 and Form DCO
    The Commission is proposing several changes to its procedures for 
DCO registration, including: The manner by which a DCO applicant would 
file supplemental information in proposed Sec.  39.3(a)(3); procedures 
in proposed Sec.  39.3(a)(4) to amend a pending application; the 
potential for an extension of the application review period in proposed 
Sec.  39.3(a)(6); and the procedures for filing a request for an 
amended order of registration in proposed Sec.  39.3(d). The Commission 
is also proposing to codify the statutory requirements in section 7 of 
the CEA to vacate an order of registration as well as specify the types 
of information that a DCO must provide to the Commission in this regard 
in proposed Sec.  39.3(f); and clarify the types of information that a 
DCO must provide to request a transfer of open interest in proposed 
Sec.  39.3(g). In addition, the Commission is proposing to revise Form 
DCO to correspond with proposed amendments to part 39 and to reflect 
Commission staff's experience with DCO applications.
a. Benefits
    The Commission believes the proposed amendments to the DCO 
registration procedures in Sec.  39.3 and Form DCO will make the 
procedures more transparent to applicants. This should allow 
prospective DCO applicants to more efficiently prepare complete 
applications, which should reduce the need for Commission staff to 
request additional information after receiving the application and 
therefore reduce the overall time needed to review an application. For 
example, the Commission is modifying Form DCO to clarify the types of 
information that are required and align the exhibits with the 
amendments proposed under part 39. These proposed amendments may reduce 
an applicant's time and resources used in responding to staff inquiries 
during the application review process, as DCO applicants would be 
better able to provide more complete, accurate, and nuanced application 
materials. The proposed amendments to Sec.  39.3 would also adapt 
certain language to better reflect terminology applicable to DCOs in 
proposed Sec.  39.3(a)(1) and (2) and (b), which could help to avoid 
confusion for potential DCO applicants and existing DCOs. Furthermore, 
the Commission is proposing to codify its long-standing procedures for 
staying an application in proposed Sec.  39.3(a)(6) to provide DCO 
applicants with greater transparency of the registration process.
    The Commission is proposing to amend Sec.  39.3(a)(2) and Form DCO 
to eliminate the required use of Form DCO to request an amended order 
of registration from the Commission. This change would better reflect 
current practice, where a DCO is permitted to file a request for an 
amended order with the Commission rather than submitting Form DCO. 
Similarly, the Commission is proposing to specify in proposed Sec.  
39.3(f) the types of information that the Commission currently requests 
to determine whether to vacate an order of registration, which would 
provide DCOs with more transparency as to the types of information that 
are required as part of a request to vacate an order of registration. 
The proposed recordkeeping requirements in Sec.  39.3(f)(1)(iii) and 
(iv), which would require a vacated DCO to continue to maintain the 
books and records that it would otherwise be required to maintain as a 
registered DCO, would provide the benefit of ensuring that a DCO does 
not vacate its registration and destroy its books and records in order 
to hinder or avoid Commission action.
    The Commission also proposes to streamline the procedures for 
requesting a transfer of open interest by separating those procedures 
in existing Sec.  39.3(g) from the procedures to notify the Commission 
of a DCO corporate structure or ownership change. Under the proposed 
amendments to Sec.  39.3(g), a DCO seeking to transfer its open 
interest would be required to submit rules for Commission approval 
pursuant to Sec.  40.5, rather than submitting a request for an order 
at least three months prior to the anticipated transfer. This would 
simplify the existing requirements and permit the transfer to take 
effect after a 45-day Commission review period. The Commission believes 
the 45-day period would ensure that clearing members are made aware of 
the intended transfer and allow the Commission to determine whether the 
transferee DCO is suitable to accept the transfer.
b. Costs
    The Commission believes DCOs would not incur any additional costs 
associated with the proposed procedures to request an amended order of 
registration in Sec.  39.3(d), as a DCO would incur the same costs if 
requesting to amend its order of registration by

[[Page 22255]]

using the current Form DCO.\83\ As to the procedures to vacate a DCO's 
registration in proposed Sec.  39.3(f), the Commission believes the 
costs would not be substantial. Any costs incurred by DCOs would more 
likely be due to the proposed recordkeeping requirements in Sec.  
39.3(f)(1)(iii) and (iv), which would require a vacated DCO to continue 
to maintain the books and records that it would otherwise be required 
to maintain as a registered DCO pursuant to Sec.  1.31(b).
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    \83\ The Commission estimates for PRA purposes that there would 
be a reduction in the burden incurred by DCOs, as discussed in 
section IX.B.1 above.
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    Finally, the Commission is proposing to amend Sec.  39.3(g) to 
permit a DCO seeking to transfer its open interest to submit rules for 
Commission approval pursuant to Sec.  40.5, rather than submitting a 
request for an order at least three months prior to the anticipated 
transfer. The Commission does not anticipate that DCOs would incur any 
additional costs as a result of these procedural changes beyond the 
costs to prepare a Sec.  40.5 rule submission, which are likely to be 
similar to the costs of requesting an order approving the transfer. 
Additionally, the information requested in proposed Sec.  39.3(g) 
reflects information that DCOs are already required to provide in order 
to transfer their open interest. The Commission does not believe DCOs 
would incur additional costs from any of the other proposed amendments 
to the DCO registration procedures in Sec.  39.3.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission evaluated the 
costs and benefits in light of the specific considerations identified 
in section 15(a) of the CEA. The Commission believes that the proposed 
changes to the registration procedures will maintain the protection of 
market participants and the public by ensuring that DCOs are in 
compliance with the DCO Core Principles and Commission regulations. The 
proposed changes would also increase efficiency by making the 
registration process more transparent. This would enable DCOs and DCO 
applicants to provide more complete documentation in a more concise 
manner, thereby reducing the time and resources needed to comply with 
such procedures. To the extent that the proposed changes to the 
registration procedures act to streamline the application process, as 
well as to establish the process for vacating a DCO's registration, the 
net result of those changes would be a more efficient process for 
registering as a DCO and for vacating that registration.
    Additionally, the Commission believes that the proposed amendments 
to Sec.  39.3(g), which addresses a request to transfer a DCO's open 
interest, will result in increased efficiency because the proposed 
amendments streamline and improve the existing process, as DCOs would 
be able to use the existing process under Sec.  40.5, with which DCOs 
are already familiar and which requires a shorter review period. As a 
result, DCOs may obtain approval to transfer their open interest in a 
timelier manner, which may benefit their operational and business 
needs. To that end, the Commission believes that these changes will 
have a beneficial effect on the risk management practices of DCOs, 
inasmuch as the proposed changes may modestly reduce the risks that may 
accompany the transfer of open interest to another DCO. Moreover, the 
proposed recordkeeping requirements for vacated DCOs will protect 
market participants and the public by ensuring that a DCO does not 
vacate its registration and destroy its books and records in order to 
hinder or avoid Commission action. The Commission has considered the 
other section 15(a) factors and believes that they are not implicated 
by the proposed amendments.
6. DCO Chief Compliance Officer--Sec.  39.10(c)
a. Benefits
    The Commission is proposing to amend Sec.  39.10(c) to allow a DCO 
to have its CCO report to the senior officer responsible for the DCO's 
clearing activities. This would provide DCOs with flexibility to 
structure the management and oversight of the CCO based on the DCO's 
particular corporate structure, size, and complexity. This may increase 
efficiency, reduce costs, and improve the quality of the oversight of 
the CCO, as the senior officer overseeing the DCO's clearing activities 
would be better positioned to provide day-to-day oversight of the CCO.
    The Commission is proposing to amend certain requirements in Sec.  
39.10(c) relating to the CCO annual report to permit DCOs to 
incorporate by reference, for up to five years, any descriptions of 
written policies and procedures that have not materially changed since 
they were described within the most recent CCO annual report. The 
ability to incorporate by reference the description of written policies 
and procedures in the CCO annual report could reduce the time and costs 
needed to prepare the CCO annual report.\84\ The Commission is also 
proposing to remove the requirement that the DCO submit the CCO annual 
report at the same time as the DCO's fiscal year-end audited financial 
statement. This is consistent with the proposed change to Sec.  
39.19(c)(3)(iv), which would allow DCOs the flexibility to submit 
required annual reports and audited year-end financial statements when 
ready but not later than 90 days after the end of the DCO's fiscal 
year. The proposed changes recognize that the DCO's year-end audited 
financial statements are prepared separately from the CCO annual report 
and therefore would not need to be prepared and submitted together.
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    \84\ The Commission estimates for PRA purposes that there would 
be a reduction in the burden incurred by DCOs, as discussed in 
section IX.B.2.a above.
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b. Costs
    The Commission is proposing to amend Sec.  39.10(c) to require that 
a DCO identify its compliance policies and procedures by name, rule 
number, or other identifier; describe the process by which the annual 
report was submitted to the board of directors or senior officer; and 
allow incorporation by reference in limited circumstances. The 
Commission notes that a number of DCOs already provide this 
information. Therefore, the Commission expects that the proposed 
changes to Sec.  39.10(c) would not impose additional costs on those 
DCOs.\85\
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    \85\ The Commission estimates for PRA purposes that there would 
be a reduction in the burden incurred by DCOs, as discussed in 
section IX.B.2.a above.
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c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) of the CEA, the Commission believes that certain of the 
proposed changes to Sec.  39.10(c) will enhance the protection of 
market participants and the public. Specifically, the proposed changes 
to a CCO's reporting lines, along with the added clarity regarding 
proper identification of the compliance policies and procedures in the 
CCO annual report, is anticipated to enhance the compliance function at 
DCOs, which may have the corresponding effect of improving the 
protections for market participants and the public. Additionally, in 
consideration of section 15(a)(2)(B) of the CEA, the proposed amendment 
to permit incorporation by reference in the CCO annual report will

[[Page 22256]]

increase efficiency in preparing that report. The Commission has 
considered the other section 15(a) factors and believes that they are 
not implicated by the proposed amendments.
7. Enterprise Risk Management--Sec.  39.10(d)
a. Benefits
    The Commission is proposing Sec.  39.10(d) to require a DCO to have 
a program of enterprise risk management that identifies and assesses 
sources of risk and their potential impact on the operations and 
services of the DCO and identify an enterprise risk officer. The 
Commission believes that requiring DCOs to establish and maintain an 
enterprise risk management program in proposed Sec.  39.10(d) may 
encourage DCOs to strengthen their existing programs, especially if a 
DCO lacks an enterprise risk management program that is commensurate 
with industry best practices. This may benefit the resiliency of 
individual DCOs' operations by requiring DCOs to proactively identify 
potential risks on an enterprise-wide basis beyond those that a DCO 
might otherwise identify pursuant to its compliance with specific 
requirements in part 39. Compliance with proposed Sec.  39.10(d) by 
DCOs who are affiliated with other registered entities such as DCMs, 
SEFs, and SDRs could also benefit the financial markets more broadly, 
as risks identified and addressed by the DCO may also apply to their 
affiliates within the derivatives markets.
    Consistent with Sec.  39.10(b), the Commission does not intend to 
be overly prescriptive by requiring specific standards and 
methodologies. Proposed Sec.  39.10(d)(3) would require a DCO to follow 
generally accepted standards and industry best practices with respect 
to the development and ongoing monitoring of its enterprise risk 
management framework, assessment of the performance of the enterprise 
risk management program, and the management and mitigation of risk to 
the DCO. The Commission is mindful that best practices evolve and 
change over time and does not, therefore, wish to prescribe specific 
standards in its regulations. This flexibility would allow DCOs to 
continue to develop enterprise risk management programs in a manner 
best suited for their specific risk exposures, product types, customer 
bases, market segments, and organizational structures, among other 
things, as long as their programs meet the proposed minimum standards 
and any other legal and regulatory requirements.
b. Costs
    The Commission has found that DCOs that proactively identify and 
manage foreseeable risks have generally implemented enterprise risk 
management frameworks, in whole or in part, to identify, assesses, and 
manage sources of risk in a manner similar to the requirements proposed 
in Sec.  39.10(d)(1)-(4). Therefore, the Commission believes that any 
additional costs associated with these requirements should be minimal 
relative to existing industry practice for those DCOs whose enterprise 
risk management programs are commensurate with industry best practices. 
Additionally, as DCOs would be able to comply with this requirement by 
including the DCO in the enterprise risk management program 
administered by the DCO's parent company or affiliate, the Commission 
believes any additional costs to comply with proposed Sec.  39.10(d) 
could be reduced if the DCO is able to share the costs of compliance 
with its parent or affiliates. DCOs that do not have an enterprise risk 
management program in line with proposed Sec.  39.10(d) or could not 
otherwise rely on its parent's or affiliate's enterprise risk 
management program would incur costs to implement such a program.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(D) of the CEA, the Commission believes that the proposal to 
require a DCO to have a formal enterprise risk management program will 
improve DCO risk management practices by ensuring that DCOs have a 
process for identifying and assessing potential risks to the DCO on an 
enterprise-wide basis, thereby enhancing protection of market 
participants and the public and the financial integrity of the 
derivatives markets. The Commission has considered the other section 
15(a) factors and believes that they are not implicated by the proposed 
amendments.
8. Financial Resources--Sec.  39.11
a. Benefits
    The Commission is proposing certain changes to Sec.  39.11, 
including: Clarifying how a DCO's largest financial exposure should be 
calculated in proposed Sec.  39.11(c)(2); requiring a DCO to use the 
same stress test scenario to combine the customer and house stress test 
losses of each clearing member in proposed Sec.  39.11(c)(2)(ii); and 
requiring a DCO to adopt rules to specifically permit the netting of 
any gains in the house account with customer losses in the event of a 
member default (and prohibiting a DCO from netting losses in the house 
account with gains in the customer account consistent with section 4d 
of the CEA, which requires the segregation of customer funds) in 
proposed Sec.  39.11(c)(2)(iii).
    The Commission believes these proposed adjustments to the 
methodology used to calculate a DCO's financial resources requirement 
in Sec.  39.11(c) would focus a DCO's analysis on the resources that 
would actually be available to it during times of stress. This approach 
is consistent with recent guidance issued by CPMI-IOSCO suggesting 
that, when assessing the adequacy of their financial resources, CCPs 
should take into account only prefunded financial resources and ignore 
voluntary excess contributions. CCPs that wish to be considered QCCPs 
are expected to follow this guidance, so having Commission requirements 
that are consistent with the guidance would benefit DCOs.
    Regulation 39.11(d)(2) sets out certain conditions that apply to a 
DCO's use of assessments for additional guaranty fund contributions in 
calculating the financial resources available to meet its obligations 
under Sec.  39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that a DCO 
shall only count the value of assessments, after a 30 percent haircut, 
``to meet up to 20 percent of those obligations.'' The Commission 
proposes to amend Sec.  39.11(d)(2) to replace the phrase ``those 
obligations'' with ``the total amount required under paragraph (a)(1) 
of this section,'' to provide DCOs with more clarity as to how to 
comply with this requirement.
    Furthermore, the Commission is proposing amendments to Sec.  
39.11(e)(1)(iii) and (e)(3) to clarify that a DCO may use a committed 
line of credit or similar facility, in whole or in part, to satisfy 
Sec.  39.11(e)(1)(ii) or (e)(2), as long as the committed line of 
credit or similar facility is not counted twice to meet the 
requirements of Sec.  39.11(e)(1)(ii) and (e)(2). This is a 
clarification of the existing requirement, which provides a DCO with 
additional flexibility to optimize the liquidity resources it holds, 
which would potentially reduce certain opportunity costs associated 
with holding more expensive types of liquid resources, such as cash.
    Regulation 39.11(f)(1)(ii) requires a DCO to file with the 
Commission a financial statement of the DCO or of its

[[Page 22257]]

parent company. The Commission is proposing to amend Sec.  
39.11(f)(1)(ii) to require that the financial statement provided be 
that of the DCO and not the parent company in order to better and more 
accurately assess the financial strength of the DCO. The Commission 
believes it would also benefit the DCO to be able to assess its 
compliance with Core Principle B and Sec.  39.11 and its financial 
health separately from that of its parent.
    The Commission is proposing to amend the periodic financial 
reporting requirements in Sec.  39.11(f)(1)(ii) and (f)(2)(i) to permit 
quarterly and annual financial statements to be prepared in accordance 
with U.S. GAAP for DCOs incorporated or organized under U.S. law and in 
accordance with either U.S. GAAP or IFRS for DCOs incorporated or 
organized under the laws of any foreign country. Although Commission 
regulations generally require financial statements to be prepared in 
accordance with U.S. GAAP, the Commission has permitted the use of IFRS 
by non-U.S. DCOs as a condition of each DCO's registration order. The 
proposed rule would retain this flexibility for non-U.S. DCOs and 
provide greater transparency to DCOs and DCO applicants of the 
financial reporting requirements.
    In reviewing DCOs' financial statements, Commission staff has noted 
that the DCO's own capital allocated to meet the requirements of Sec.  
39.11(a)(1) or (2) often are not identified accordingly. The Commission 
therefore is proposing in Sec.  39.11(f)(1)(ii) and (f)(2)(i) to 
require that assets allocated by the DCO for such purpose must be 
clearly identified on the DCO's balance sheet as held for that purpose. 
As a result, DCOs would have the opportunity to more clearly 
demonstrate that they have satisfied the requirements of Sec.  
39.11(a)(1) or (2) and, in doing so, may avoid unnecessary follow-up 
questions from Commission staff.
    The Commission also is proposing to require in Sec.  39.11(f)(2) 
that, in addition to its audited year-end financial statement, a DCO 
would be required to submit: (1) A reconciliation, including 
appropriate explanations, of its balance sheet when material 
differences exist between it and the balance sheet in the DCO's 
financial statement for the last quarter of the fiscal year or, if no 
material differences exist, a statement so indicating, and (2) such 
further information as may be necessary to make the statements not 
misleading. Without such an explanation, Commission staff may be under 
the impression that the representations are false or incorrect. This 
requirement gives DCOs the opportunity to correct any discrepancies and 
avoid unnecessary follow-up questions from Commission staff.
    Regulation 39.11(f)(3) requires a DCO to provide to the Commission 
documentation of the DCO's financial resources methodology and basis 
for valuation and liquidity determinations as part of its quarterly 
financial reporting. The Commission is proposing to revise Sec.  
39.11(f)(3) to provide that a DCO must send this documentation to the 
Commission only upon the DCO's first submission under Sec.  39.11(f)(1) 
and in the event of any change thereafter. Not requiring this 
documentation to be provided each quarter could reduce a DCO's 
reporting costs.\86\
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    \86\ The Commission estimates for PRA purposes that there would 
be a reduction in the burden incurred by DCOs, as discussed in 
section IX.B.2.c.ii above.
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    The Commission is proposing to amend Sec.  39.11(f)(4) to require 
that DCOs provide a certification as to the accuracy and completeness 
of the DCO's quarterly financial report filed pursuant to proposed 
Sec.  39.11(f)(1), annual report filed pursuant to proposed Sec.  
39.11(f)(2), and any other reports filed pursuant to proposed Sec.  
39.11(f)(3). The Commission believes a certification requirement will 
provide greater transparency with regard to the submission process and 
may increase the level of accountability at the DCO, which may lead to 
greater accuracy in reporting.
b. Costs
    DCOs could incur initial costs to recalibrate the method by which 
they compute their financial resources to comply with proposed Sec.  
39.11(c). If a DCO does not have financial resources sufficient to 
comply with Sec.  39.11(a)(1) based on its computation pursuant to 
proposed Sec.  39.11(c), the DCO would have to procure additional 
financial resources. Because DCOs vary in terms of their size and level 
of clearing activity, the Commission believes they are better 
positioned to provide cost estimates in this regard.
    DCOs may incur costs to prepare their own financial statements (as 
opposed to financial statements of the parent company) in accordance 
with proposed Sec.  39.11(f)(1)(ii). For DCOs that already prepare 
their own financial statements, incremental costs will not be as large 
as suggested by the regulatory baseline. DCOs may incur minimal costs 
in identifying in their balance sheet assets allocated to meet the 
requirements of Sec.  39.11(a)(1) or (2). DCOs may also incur minimal 
costs to prepare a reconciliation of their balance sheet when material 
differences exist as compared to the DCO's financial statement for the 
last quarter of the fiscal year.
    The Commission believes DCOs may incur additional costs associated 
with complying with the proposed certification requirements in Sec.  
39.11(f)(4). These costs may be reduced for DCOs that already provide 
them. The Commission recognizes that a DCO may have to develop a 
process in certifying its financial reports; however, the Commission 
believes that these costs may be reduced for DCOs to the extent that 
they already have this process in place.\87\
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    \87\ See 17 CFR 228, 229, 232, 240, 249, 270 and 274.
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c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) of the CEA, the Commission believes that the proposed 
amendments to Sec.  39.11 will result in improved protections for 
market participants and the public. Specifically, the proposed 
adjustments to the methodology used to calculate a DCO's financial 
resources requirement in Sec.  39.11(c) and the corresponding 
improvements to a DCO's stress testing results are expected to enhance 
the safety and soundness of DCOs and their ability to manage their 
risks, thereby better protecting DCOs' clearing members and their 
customers, market participants, and the public. Additionally, in 
further consideration of section 15(a)(2)(A) of the CEA, the proposal 
to require in Sec.  39.11(f)(1)(ii) the financial statement of the DCO 
and not that of its parent company, is expected to better and more 
accurately assess the financial strength of the DCO, which will 
ultimately serve to protect market participants and the public and 
further the financial integrity of derivatives markets. In 
consideration of section 15(a)(2)(B) of the CEA, the Commission 
believes that, to the extent that the proposed amendments to Sec.  
39.11 will result in increased clarity or transparency, as explained 
above, those changes are anticipated to result in an incremental 
increase in efficiency. In consideration of section 15(a)(2)(D) of the 
CEA, the Commission believes the proposed adjustments to the 
methodology used to calculate a DCO's financial resources requirement 
in Sec.  39.11(c) would focus a DCO's analysis on the resources that 
would actually be available to it during times of stress, thereby 
improving the DCO's risk

[[Page 22258]]

management practices. The Commission has considered the other section 
15(a) factors and believes that they are not implicated by the proposed 
amendments.
9. Participant and Product Eligibility--Sec.  39.12
    Regulation 39.12(b)(2) provides that a DCO shall adopt rules 
providing that all swaps with the same terms and conditions are 
economically equivalent within the DCO. As it was not the intention of 
the Commission to require DCOs that do not clear swaps to adopt the 
rules required under this provision, the Commission is proposing to 
revise Sec.  39.12(b)(2) so that it explicitly applies only to DCOs 
that clear swaps. This could reduce rulebook drafting costs for future 
DCO applicants that do not intend to accept swaps for clearing. The 
Commission believes the proposed amendments to Sec.  39.12 would not 
impose costs on DCOs or swaps market participants, as they would not be 
clearing swaps through a DCO that does not accept swaps for clearing. 
The Commission has considered the section 15(a) factors and believes 
that they are not implicated by these proposed amendments.
10. Risk Management--Sec.  39.13
a. Benefits
    Regulation 39.13(g)(2)(i) requires that a DCO have initial margin 
requirements that are commensurate with the risks of each product and 
portfolio, including any unusual characteristics of, or risks 
associated with, particular products or portfolios. The regulation 
currently notes that such risks include but are not limited to jump-to-
default risk or similar jump risk. The Commission is proposing to amend 
Sec.  39.13(g)(2)(i) to note that such risks also include 
``concentration of positions.'' Recent events, including a significant 
loss from a default at a central counterparty outside of the 
Commission's jurisdiction, highlight the importance of addressing those 
risks. This change would serve to benefit DCOs and their clearing 
members by making the rule more explicit.
    Regulation 39.13(g)(3) requires a DCO to have its systems for 
initial margin requirements reviewed and validated by a qualified and 
independent party on a regular basis. The Commission is proposing to 
specify that ``on a regular basis'' means annually. Additionally, Sec.  
39.13(g)(3) provides that an employee of the DCO may conduct such 
independent validations as long as they are not responsible for the 
development or operation of the systems and models being tested. 
Proposed Sec.  39.13(g)(3) would expand the pool of eligible employees 
to include employees of an affiliate of the DCO, which would provide 
DCOs with greater flexibility in selecting appropriate staff to conduct 
the validations.
    Furthermore, the Commission is proposing new Sec.  39.13(g)(7)(iii) 
to clarify that, in conducting back tests of initial margin 
requirements, a DCO should compare portfolio losses only to those 
components of initial margin that capture changes in market risk 
factors. This proposal would ensure that back testing of a DCO's 
initial margin model is more appropriately calibrated.
    Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin 
on a gross basis for each clearing member's customer account(s). Based 
on feedback received from DCOs, the Commission understands that there 
are significant operational issues that may affect the ability of 
clearing members to accurately determine the positions of individual 
customers on an intraday basis with respect to certain types of 
transactions (e.g., transfers, give-ups, and allocations of block 
orders) and with respect to certain types of market participants (e.g., 
locals and high frequency traders). Therefore, intraday gross margin 
calculations may result in some clearing members being charged too much 
margin and others being charged too little margin, which could 
necessitate significant end-of-day adjustments. Accordingly, the 
Commission proposes to amend Sec.  39.13(g)(8)(i) to permit a DCO to 
collect customer initial margin from its clearing members on a gross 
basis only during its end-of-day settlement cycle. Proposed Sec.  
39.13(g)(8)(i) is consistent with market feedback and attempts to 
provide DCOs with more flexibility in meeting the requirements in light 
of the operational issues that may arise intraday.
    Regulation 39.13(g)(8)(ii) provides that a DCO must require its 
clearing members to collect customer initial margin from their 
customers, ``for non-hedge positions, at a level that is greater than 
100 percent of the [DCO]'s initial margin requirements with respect to 
each product and swap portfolio.'' Consistent with interpretative 
guidance issued by the Division, the Commission is proposing to amend 
Sec.  39.13(g)(8)(ii) to permit DCOs to establish customer initial 
margin requirements based on the type of customer account and to apply 
prudential standards that result in FCMs collecting customer initial 
margin at levels commensurate with the risk presented by each customer 
account. The proposed amendments to Sec.  39.13(g)(8)(ii) would give 
DCOs reasonable discretion in determining the percentage by which 
customer initial margin requirements must exceed the DCO's clearing 
initial margin requirements with respect to particular products or 
portfolios. This approach acknowledges that the existing standard does 
not appropriately take into account each DCO's particular circumstances 
and the nature of its clearing members and their customers.
    Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on 
each clearing member, by house origin and by each customer origin, in 
order to prevent a clearing member from carrying positions for which 
the risk exposure exceeds a specified threshold relative to the 
clearing member's and/or the DCO's financial resources. The Commission 
is proposing to note that such risk limits should also be imposed to 
address positions that may be difficult to liquidate. As noted above, 
recent events highlight the importance of imposing risk limits to 
address positions that may be difficult to liquidate, particularly 
concentrated positions. The proposed change would help to ensure that a 
DCO can properly manage its risks in instances where, for example, a 
position in a particular contract or swap is concentrated with a 
particular member, such that there is reason to doubt whether, in the 
event that this member defaults, other members would be willing and 
able to accept, collectively, the entirety of that position or swap.
    Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis, 
review the risk management policies, procedures, and practices of each 
of its clearing members, which address the risks that such clearing 
members may pose to the DCO, and to document such reviews. The 
Commission is proposing to clarify that DCOs should, having conducted 
such reviews, take appropriate actions to address concerns identified 
in such reviews, and require that the documentation of the reviews 
should include the basis for determining what action was appropriate to 
take. Absent such follow-up, the reviews would lack purpose. The 
proposed change would help to ensure that DCOs are taking steps to 
manage any risks posed by their members, thereby enhancing the DCO's 
risk management functions.
b. Costs
    The Commission is proposing to amend Sec.  39.13(g)(2)(i) to 
clarify that a DCO shall have initial margin requirements that are 
commensurate with the risks of each product and portfolio, including, 
but not limited to, concentration of positions. The Commission is 
merely clarifying that

[[Page 22259]]

concentrated positions are one of the risks that DCOs should be 
incorporating in their initial margin requirements. The Commission does 
not believe that DCOs, or their clearing members, would incur any 
additional costs with this clarification.
    In addition, Sec.  39.13(g)(3) requires that a DCO's systems for 
generating initial margin requirements, including its theoretical 
models, be reviewed and validated by a qualified and independent party 
on a regular basis. The provision further provides that employees of 
the DCO may conduct the validations as long as they are not responsible 
for the development or operation of the systems and models being 
tested. The Commission is proposing to amend Sec.  39.13(g)(3) to 
specify that ``on a regular basis'' means annually and to also permit 
employees of an affiliate of the DCO to conduct such independent 
validations. The Commission believes these amendments would not impose 
additional costs on DCOs insofar as DCOs were already interpreting 
``regular'' to mean annual, but rather may reduce costs by permitting 
the use of employees of a DCO's affiliate when conducting the 
independent validations.
    The Commission is proposing new Sec.  39.13(g)(7)(iii) to specify 
that, in conducting back tests of initial margin requirements, a DCO 
shall compare portfolio losses only to those components of initial 
margin that capture changes in market risk factors. This change is 
intended to reflect existing practices; therefore, any costs associated 
with this change would be reduced for DCOs that already follow this 
approach.
    Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin 
on a gross basis for each clearing member's customer account(s). As 
noted above, after the regulation was adopted, Division staff learned 
of operational issues that DCOs would face if the provision applied to 
intraday settlements as well as end-of-day settlements. As a result, 
the Commission proposes to amend Sec.  39.13(g)(8)(i) to permit a DCO 
to collect customer initial margin from its clearing members on a gross 
basis only during its end-of-day settlement cycle. Because this change 
is intended to reflect existing practice, any costs associated with 
this change would be reduced for those DCOs that already follow this 
approach.
    Regulation 39.13(g)(8)(i)(B) provides that, for purposes of 
calculating the gross initial margin requirement for clearing members' 
customer accounts, a DCO may require its clearing members to report to 
the DCO the gross positions of each individual customer or the sum of 
the gross positions of its customers. The Commission is proposing 
amendments to Sec.  39.13(g)(8)(i)(B) to require a DCO to have rules 
requiring its clearing members to report customer information about 
futures (as well as swaps) to DCOs. This will enable DCOs, in turn, to 
report this information to the Commission under Sec.  
39.19(c)(1)(i)(D), which, as proposed, would require DCOs to report the 
positions themselves (i.e., the long and short positions) as well as 
risk sensitivities and valuation data for end-of-day positions. The 
Commission believes adopting and implementing such rules could impose 
nominal cost on DCOs. In addition, clearing members may incur costs 
associated with reporting this data to the extent they are not already 
doing so.
    The Commission is proposing to amend Sec.  39.13(g)(12) by 
requiring DCOs to increase the frequency by which they evaluate the 
appropriateness of haircuts that they apply to initial margin 
collateral from a quarterly basis to a monthly basis. Because Sec.  
39.11(d)(1) already requires that haircuts be evaluated on a monthly 
basis for assets that are used to meet the DCO's financial resources 
obligations set forth in Sec.  39.11(a), and those resources include 
initial margin, the Commission does not believe this change will result 
in any increase in costs.
    In Sec.  39.13(h)(1)(i), the Commission is proposing to require 
that, in determining a clearing member's risk limits under existing 
Sec.  39.13(h)(1)(i), the factors that a DCO considers must include the 
difficulty of liquidating the clearing member's positions. The 
Commission believes that this change may impose minimal costs.
    In Sec.  39.13(h)(5)(ii), the Commission is proposing to clarify 
that a DCO should take appropriate actions to address concerns 
identified in its review of the risk management policies of its 
clearing members. The Commission believes that DCOs already do this as 
part of their compliance with existing Sec.  39.13(h)(5)(ii).
    In Sec.  39.13(i), the Commission is proposing to require a DCO to 
provide certain information as part of a rule filing submitted for 
Commission approval pursuant to Sec.  40.5 to facilitate the 
Commission's review of a DCO's cross-margining program. This 
information includes: Identification of the products that would be 
eligible for cross-margining; analysis of the risk characteristics, the 
liquidity of the respective markets, and availability of reliable 
prices; financial and operational requirements that would apply to 
clearing members participating in the program; a description and 
analysis of the margin methodology that would be used to calculate 
initial margin requirements; procedures the DCO would follow in the 
event of a clearing member default; a description of the arrangements 
for obtaining daily position data with respect to products in the 
account; whether funds to support the cross-margined positions will be 
maintained together in one account or in separate accounts at each 
participating clearing organization; and a copy of the agreement 
between the clearing organizations participating in the cross-margining 
program. A DCO may incur costs to prepare and provide this information.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) and (D) of the CEA, the Commission believes that the 
proposed amendments to Sec.  39.13 will aid in the protection of market 
participants and the public by enhancing certain risk management 
requirements of DCOs. For example, proposed Sec.  39.13(g)(12) would 
require DCOs to increase the frequency by which they evaluate the 
appropriateness of haircuts that they apply to initial margin 
collateral. Given that initial margin is held for risk management 
purposes, assessing haircuts more frequently would enhance a DCO's 
ability to manage its risks. In addition, the proposed amendments to 
Sec.  39.13 will help preserve the efficiency and financial integrity 
of the derivatives markets by enhancing certain risk management 
requirements of DCOs. For example, in consideration of section 
15(a)(2)(B) of the CEA, the Commission believes the proposed amendments 
to Sec.  39.13(h)(1)(i), which would specify that a DCO's risk limits 
should address positions that may be difficult to liquidate, would help 
to ensure that a DCO can properly manage its risks in the event of a 
default, thereby promoting the financial integrity of the derivatives 
markets. The Commission also believes that the amendments to Sec.  
39.13 will strengthen and promote sound risk management practices 
across DCOs, their clearing members, and clearing members' customers. 
Specifically, the amendments enhance, clarify, and provide flexibility 
in complying with several DCO risk management requirements, which will 
aid DCOs in efficiently allocating their risk management attention and 
resources. Finally, in consideration of

[[Page 22260]]

section 15(a)(2)(E) of the CEA, the Commission notes the public 
interest in promoting and protecting public confidence in the safety 
and security of the financial markets. DCOs are essential to risk 
management in the financial markets, both systemically and on an 
individual firm level. The proposed amendments, by enhancing, 
clarifying, and providing flexibility beyond current requirements, 
promote the ability of DCOs to perform these risk management functions. 
The Commission has considered the other section 15(a) factors and 
believes that they are not implicated by the proposed amendments.
11. Treatment of Funds--Sec.  39.15
a. Benefits
    The Commission is proposing to amend Sec.  39.15(b)(1) to clarify 
that ``funds and assets'' are equivalent to ``money, securities, and 
property,'' which would better align the language of Sec.  39.15(b)(1) 
with the language in the CEA. Furthermore, Sec.  39.15(b)(2)(ii) 
requires a DCO to file a petition for an order pursuant to section 
4d(a) of the CEA in order for the DCO and its clearing members to 
commingle customer positions in futures, options, and swaps in a 
futures customer account subject to section 4d(a) of the CEA The 
Commission is proposing to amend Sec.  39.15(b)(2)(ii) to permit a DCO 
to file rules for Commission approval pursuant to Sec.  40.5 in order 
for the DCO and its clearing members to commingle such positions. This 
would better align the requirements of Sec.  39.15(b)(2)(ii) with Sec.  
39.15(b)(2)(i), which requires a DCO that wants to commingle futures, 
options, and swaps in a cleared swaps customer account to file rules 
for Commission approval. This approach would reduce the burden on DCOs 
while providing the Commission with sufficient means to determine 
whether the customer funds will be adequately protected.
    Regulation 39.15(d) requires a DCO to have rules providing for the 
prompt transfer of all or a portion of a customer's portfolio of 
positions and related funds at the same time from the carrying clearing 
member to another clearing member, without requiring the close-out and 
re-booking of the positions prior to the requested transfer. Based on 
feedback received from DCOs, the Commission is proposing to amend Sec.  
39.15(d) to delete the words ``at the same time,'' thus requiring the 
``prompt,'' but not necessarily simultaneous, transfer of a customer's 
positions and related funds. The Commission is further amending the 
provision to require the transfer of related funds ``as necessary,'' 
recognizing that the transfer of customer positions will not always 
require the transfer of funds. These changes are meant to reflect 
common practice and provide greater flexibility to DCOs in transferring 
positions and funds. The Commission is also proposing to amend Sec.  
39.15(e), which relates to permitted investments of customer funds, to 
clarify that the regulation applies to any investment of customer funds 
or assets, including cleared swaps customer collateral, as defined in 
Sec.  22.1. At the time Sec.  39.15(e) was adopted, the Commission had 
not yet adopted regulations concerning cleared swaps customer funds but 
intended for Sec.  39.15(e) to also apply to those funds. This change 
would ensure that cleared swaps customer collateral receives the same 
safekeeping as other funds and assets invested by DCOs and would 
reflect the Commission's intent.
b. Costs
    The Commission believes proposed amendments to Sec.  
39.15(b)(2)(ii) to permit a DCO to file rules for Commission approval 
pursuant to Sec.  40.5 in order for the DCO and its clearing members to 
commingle certain customer positions would streamline the procedures 
for a request to commingle customer funds and would not increase costs 
to DCOs. As discussed above, the proposal would potentially reduce 
costs for DCOs that would otherwise have to petition the Commission for 
an order providing relief from section 4d of the CEA in order to 
commingle such customer funds. The Commission has not identified any 
other costs associated with the proposed amendments to Sec.  39.15, 
including costs to customers in this regard.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) of the CEA, the Commission believes that the proposed 
amendments to Sec.  39.15 will aid in the protection of market 
participants and the public, specifically customers of clearing 
members, by providing clarity on several requirements related to the 
treatment of customer funds, including with respect to the transfer of 
customer positions and funds under Sec.  39.15(d). Moreover, the 
proposed amendments will promote efficiency in the derivatives markets 
by streamlining the procedures for a request to commingle customer 
funds, as DCOs would be permitted to file rules for Commission approval 
whether requesting to commingle customer funds in a futures or cleared 
swaps customer account. The Commission has considered the other section 
15(a) factors and believes that they are not implicated by the proposed 
amendments.
12. Default Rules and Procedures--Sec.  39.16
a. Benefits
    The Commission is proposing to amend Sec.  39.16 to improve DCOs' 
default management processes by, among other things: Requiring a DCO to 
include its clearing members in an annual test of its default 
management plan in proposed Sec.  39.16(b); requiring the DCO to 
establish a default committee, which must include clearing members and 
other participants, that would convene in the event of a default 
involving substantial or complex positions to help identify any market 
issues that the DCO is considering in proposed Sec.  39.16(c)(1); and 
requiring a DCO's default management procedures to include immediately 
posting a declaration of a default on the DCO's website in proposed 
Sec.  39.16(c)(2)(ii). The proposed amendments are intended to ensure 
that clearing members are prepared in the event of a default.
    The Commission is also proposing to amend Sec.  39.16(c)(2)(iii)(C) 
to require any allocation of a defaulting clearing member's positions 
to be proportional to the size of the participating or accepting 
clearing member's positions in the same product class at the DCO. This 
proposed amendment would ensure that clearing members have the 
flexibility, but not the requirement, to participate in auctions and 
allocations beyond the proportional size of their respective positions 
as measured by the initial margin requirement for those positions. This 
ensures that clearing members cannot be forced to involuntarily absorb 
positions of a defaulting member which incentivizes the DCO to 
calibrate its risk management mechanisms in a manner to avoid a 
scenario in which clearing members' participation in an auction or 
allocation falls short of the size of the defaulting clearing member's 
positions in that product class.
b. Costs
    To comply with the proposal to require the participation of 
clearing members in a test of a DCO's default management plan and in a 
DCO's default committee, a DCO may incur costs to coordinate clearing 
members' participation and to establish a default committee. However, 
the Commission

[[Page 22261]]

believes that many DCOs already involve clearing members in their tests 
as a matter of best practice. The Commission is not aware of a less 
costly alternative that would provide clearing members with an 
opportunity to participate in key aspects of a DCO's default 
management.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) of the CEA, the Commission believes that the proposed 
amendments to Sec.  39.16(c)(2)(ii) to require that a DCO have default 
procedures that include immediate public notice on the DCO's website of 
a declaration of default will aid in the protection of market 
participants and the public by ensuring more timely notice of a 
default. In further consideration of section 15(a)(2)(A) of the CEA, 
the Commission believes the proposed amendments to Sec.  
39.16(c)(2)(iii)(C) regarding the allocation of a defaulting clearing 
member's positions would protect clearing members from involuntarily 
having to bid on or accept defaulting positions that are not in 
proportion to the size of their positions in that product class, while 
also providing clearing members with the flexibility to voluntarily bid 
on or accept more than a proportional share of the defaulting positions 
if that clearing member has the ability to manage the risk of those new 
positions. In consideration of section 15(a)(2)(B) and (D) of the CEA, 
the Commission believes the additional amendments to Sec.  39.16(b) and 
(c)(1) support the financial integrity of the derivatives markets and 
promote sound risk management practices by requiring DCOs to have 
greater clearing member participation in their default management 
processes and procedures. The Commission has considered the other 
section 15(a) factors and believes that they are not implicated by the 
proposed amendments.
13. Rule Enforcement--Sec.  39.17
a. Benefits
    Regulation 39.17(a) codifies Core Principle H, which requires a DCO 
to maintain adequate arrangements and resources for the effective 
monitoring and enforcement of compliance with its rules and dispute 
resolution. The Commission is proposing a technical change to Sec.  
39.17(a)(1) to emphasize that a DCO is required to monitor and enforce 
compliance by both itself and its members with the DCO's rules. The 
Commission is also proposing to amend Sec.  39.17(b), which permits a 
DCO's board of directors to delegate its responsibility for compliance 
with the requirements of Sec.  39.17(a) to the DCO's risk management 
committee, to allow a DCO to delegate such responsibility to a 
committee other than the risk management committee. This would allow 
DCOs more discretion in delegating this function to the most 
appropriate committee.
b. Costs
    The Commission does not believe the proposed amendments to Sec.  
39.17(a)(1) or (b) will impose any additional costs on DCOs or their 
members because the changes are technical in nature.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(D) of the CEA, the Commission believes that the proposed 
amendments to Sec.  39.17 will promote sound risk management practices 
by emphasizing the importance of compliance with DCO rules and by 
providing DCOs with additional flexibility in structuring their 
governance arrangements. The Commission has considered the other 
section 15(a) factors and believes that they are not implicated by the 
proposed amendments.
14. Reporting--Sec.  39.19
a. Benefits
    The Commission is proposing several amendments to Sec.  39.19 to 
add new requirements, clarify certain existing requirements, and 
incorporate other proposed amendments to part 39. The proposed 
amendments to Sec.  39.19 would assist DCOs by codifying the bulk of 
DCOs' ongoing reporting requirements in one section of part 39 and 
providing additional detail with respect to certain requirements. In 
some cases, the Commission is proposing to adopt additional reporting 
requirements that would allow the Commission to conduct more effective 
oversight of DCOs' compliance with the DCO Core Principles and 
Commission regulations.
    As part of the daily reporting requirements, the Commission is 
proposing to amend Sec.  39.19(c)(1)(i)(A)-(C) to specify that a DCO is 
required to report margin, cash flow, and position information by 
individual customer account. The Commission believes the ability to 
analyze positions at the customer level is a crucial element of an 
effective risk surveillance program. The ability to identify those 
customers whose positions create the most risk to a DCO's clearing 
members would assist the Commission in determining whether adequate 
measures are in place to address those risks and whether the Commission 
needs to take proactive steps to see that those risks are mitigated, 
thereby enhancing the protections afforded to the markets generally. 
The Commission is also proposing to amend Sec.  39.19(c)(1)(i)(D) to 
specify that, with respect to end-of-day position information, DCOs 
must report the positions themselves (i.e., the long and short 
positions) as well as risk sensitivities and valuation data for these 
positions.\88\ This information will better inform staff of the 
assumptions incorporated into the position information. The Commission 
is also proposing to amend Sec.  39.19(c)(1)(i)(D) to have DCOs provide 
any legal entity identifiers and internally-generated identifiers 
within each customer origin for each clearing member, which would help 
identify customers across clearing members and DCOs.
---------------------------------------------------------------------------

    \88\ The Commission estimates for PRA purposes that there would 
be an increase in the burden incurred by DCOs, as discussed in 
section IX.B.2.d above.
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    The Commission is proposing to add certain event-specific reporting 
requirements, including: A decrease in liquidity resources in proposed 
Sec.  39.19(c)(4)(ii); a legal name change in proposed Sec.  
39.19(c)(4)(xi); a change in any liquidity funding arrangement in 
proposed Sec.  39.19(c)(4)(xiii); a change in settlement bank 
arrangements in proposed Sec.  39.19(c)(4)(xiv); a change in a DCO's 
arrangements with its depositories that hold customer funds in proposed 
Sec.  39.19(c)(4)(xvi); a change in the DCO's fiscal year end in 
proposed Sec.  39.19(c)(4)(xx); a change in the DCO's accounting firm 
in proposed Sec.  39.19(c)(4)(xxi); major decisions of the DCO's board 
in proposed Sec.  39.19(c)(4)(xxii); issues with a DCO's margin model 
in proposed Sec.  39.19(c)(4)(xxiv) or settlement bank in proposed 
Sec.  39.19(c)(4)(xv); and new futures or option products accepted for 
clearing by the DCO in proposed Sec.  39.19(c)(4)(xxvi). The Commission 
believes it is important for it to be aware of these changes due to 
their potential impact on a DCO's operations.
b. Costs
    The Commission expects a minimal cost burden with respect to the 
proposed changes to the event-specific reporting requirements under 
Sec.  39.19(c)(4), in part because the incidents that would trigger 
such

[[Page 22262]]

reporting do not occur very often. Furthermore, where reporting is 
required under Sec.  39.19(c)(4), a DCO is required to provide a brief 
notice with only the pertinent details of the incident. Therefore, the 
Commission believes any costs imposed by these changes would be 
nominal.
    With respect to daily reporting requirements, the Commission 
understands that most DCOs already report the information that would be 
required. Because staff guidance regarding the format and manner of 
this reporting is periodically updated, the Commission understands that 
there may be costs associated with making technical changes to 
accommodate these updates. The Commission requests an estimate of any 
such costs from DCOs that currently report this information.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) and (D) of the CEA, the Commission believes that the 
proposed amendments to Sec.  39.19 will promote the protection of 
market participants and the public and contribute to sound risk 
management practices by providing the Commission with timely 
information that is critical to its risk surveillance efforts. Also, in 
consideration of section 15(a)(2)(D) of the CEA, the Commission 
believes that requiring DCOs to provide notice to the Commission of 
certain additional events under Sec.  39.19, such as a decrease in 
liquidity resources, settlement bank issues, and margin model issues, 
could further incentivize DCOs to avoid those risks, or to mitigate 
them more effectively if they do occur. The Commission has considered 
the other section 15(a) factors and believes that they are not 
implicated by the proposed amendments.
15. Public Information--Sec.  39.21
a. Benefits
    The Commission is proposing to amend the public reporting 
requirements of Sec.  39.21 to require that DCOs make each of the items 
of information listed in proposed Sec.  39.21(c) \89\ available 
separately on the DCO's website instead of merely including them in the 
DCO's rulebook. This would assist DCOs' current and prospective 
clearing members and the general public in locating the relevant 
information. Furthermore, Sec.  39.21(c)(4) requires a DCO to publicly 
disclose the size and composition of its financial resource package 
available in the event of a clearing member default. To address 
questions concerning how often this information must be updated, the 
Commission is proposing to amend Sec.  39.21(c)(4) to clarify that it 
should be updated quarterly, consistent with Sec.  39.11(f)(1)(i)(A), 
which requires a DCO to report this information to the Commission each 
fiscal quarter. The proposed change would assist DCOs in complying with 
this requirement, while ensuring consistent and timely disclosure to 
the public.
---------------------------------------------------------------------------

    \89\ Regulation 39.21(c) requires a DCO to disclose publicly and 
to the Commission information concerning: (1) The terms and 
conditions of each contract, agreement, and transaction cleared and 
settled by the DCO; (2) each clearing and other fee that the DCO 
charges its clearing members; (3) the margin-setting methodology; 
(4) the size and composition of the financial resource package 
available in the event of a clearing member default; (5) daily 
settlement prices, volume, and open interest for each contract, 
agreement, or transaction cleared or settled by the DCO; (6) the 
DCO's rules and procedures for defaults in accordance with Sec.  
39.16; and (7) any other matter that is relevant to participation in 
the clearing and settlement activities of the DCO.
---------------------------------------------------------------------------

b. Costs
    Because the proposed amendments to Sec.  39.21 merely require a DCO 
to separately make public information that would otherwise be made 
public in its rulebook, the Commission anticipates any additional costs 
to DCOs would be minimal.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A), (B), and (D) of the CEA, the Commission believes that the 
proposed amendments to Sec.  39.21 would enhance existing protection of 
market participants and the public; promote the efficiency and 
financial integrity of the derivatives markets; and aid in sound risk 
management practices by ensuring that key public information about the 
DCO's operations is readily accessible, complete, and current. The 
Commission has considered the other section 15(a) factors and believes 
that they are not implicated by the proposed amendments.
16. Governance Fitness Standards, Conflicts of Interest, and 
Composition of Governing Boards--Sec. Sec.  39.24, 39.25, and 39.26
a. Benefits
    The Commission is proposing to remove Sec.  39.32, which sets forth 
requirements for governance arrangements for SIDCOs and subpart C DCOs, 
and adopt new Sec. Sec.  39.24, 39.25, and 39.26, which would 
incorporate all of the requirements of Sec.  39.32. All DCOs, including 
SIDCOs and subpart C DCOs, would be subject to the same governance 
fitness standards, conflict of interest requirements, and board 
composition requirements, which most DCOs already meet in order to be 
considered a QCCP. This would give DCOs clear direction on how to 
comply with Core Principles O, P, and Q,\90\ the only DCO Core 
Principles for which the Commission has yet to adopt implementing 
regulations. Further, consistent with Core Principle Q, proposed Sec.  
39.26 would require that a DCO's governing board or committee includes 
market participants. Because the Commission has become aware of issues 
in interpreting this requirement, the Commission proposes to define 
``market participant,'' as well as specify that market participation is 
required on the DCO's governing board or governing committee, i.e., the 
group with the ultimate decision-making authority. This would avoid 
ambiguity and provide DCOs with greater clarity.
---------------------------------------------------------------------------

    \90\ Core Principles O, P, and Q respectively address governance 
arrangements, conflicts of interest, and composition of governing 
boards.
---------------------------------------------------------------------------

b. Costs
    DCOs may incur costs to comply with the proposed requirements in 
Sec. Sec.  39.24, 39.25, and 39.26.\91\ Some DCOs must already comply 
with these standards and will not face incremental costs. The language 
that is proposed to be adopted in Sec. Sec.  39.24, 39.25, and 39.26 is 
essentially the same as that which is included in Sec.  39.32. 
Regulation 39.32 is applicable to SIDCOs and subpart C DCOs and 
implements guidance from the PFMIs with which a CCP must comply in 
order to be considered a QCCP. Non-U.S. DCOs that are neither SIDCOs 
nor subpart C DCOs are generally held to these requirements by their 
home country regulators for the same reason. The Commission believes 
these standards are appropriate for all DCOs and incorporate best 
practices within the clearing industry.
---------------------------------------------------------------------------

    \91\ The Commission estimates for PRA purposes that there would 
be an increase in the burden incurred by DCOs, as discussed in 
section IX.B.2.g above.
---------------------------------------------------------------------------

c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. Although the Commission 
believes that most, if not all, DCOs already comply with these

[[Page 22263]]

requirements, to the extent they do not, the Commission believes the 
adoption of Sec. Sec.  39.24, 39.25, and 39.26 would improve DCO risk 
management practices by promoting transparency of governance 
arrangements and making sure that the interests of a DCO's clearing 
members and, where relevant, their customers are taken into account. 
This would further enhance the protection of market participants and 
the public and the financial integrity of the derivatives markets.
17. Legal Risk--Sec.  39.27
    The Commission is proposing to amend Sec.  39.27(c) to require a 
DCO that provides clearing services outside the United States to ensure 
that the memorandum required in Exhibit R of Form DCO remains accurate 
and up-to-date. This would ensure that the DCO remains aware of any 
potential choice of law issues that may impact the enforceability of 
the DCO's rules, procedures, and contracts in all relevant 
jurisdictions. The Commission believes this requirement would not 
impose additional costs on DCOs that already maintain compliance with 
Sec.  39.27(c), as DCOs with prudent risk management practices should 
continuously assess their rules, procedures, and policies against the 
laws and regulations of the jurisdictions in which they operate. For 
the same reason, the Commission does not anticipate that this 
requirement will have a direct impact on any of the section 15(a) 
factors.
18. Fully-Collateralized Positions--Sec. Sec.  39.2, 39.11, 39.12, 
39.13, and 39.19
a. Benefits
    As discussed above, fully-collateralized positions do not expose 
DCOs to many of the risks that traditionally margined products do. Full 
collateralization prevents a DCO from being exposed to credit risk 
stemming from the inability of a clearing member or customer of a 
clearing member to meet a margin call or a call for additional capital. 
This limited exposure and full collateralization of that exposure 
renders certain provisions of part 39 inapplicable or unnecessary. As a 
result, the Division has granted relief from certain provisions of part 
39 to DCOs that clear fully-collateralized positions. The Commission is 
proposing to codify this relief in order to provide greater clarity to 
DCOs and future applicants for DCO registration regarding how the 
regulations in part 39 apply to DCOs that clear fully-collateralized 
positions. DCOs that clear fully-collateralized positions would no 
longer need to request relief from certain part 39 requirements nor 
attempt to comply with those requirements, thereby conserving such 
DCOs' time and resources.
b. Costs
    The Commission does not anticipate any costs associated with these 
amendments, as the proposed rules remove requirements that need not 
apply to fully-collateralized positions.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(B) of the CEA, the Commission believes that the proposal to 
codify relief that the Commission has granted to DCOs that clear fully-
collateralized positions from requirements that do not apply to these 
positions, may increase operational efficiency for such DCOs. The 
proposed amendments should not impact the protection of market 
participants and the public, the financial integrity of markets, or 
sound risk management practices, as the requirements that the 
Commission is proposing to exclude for fully-collateralized positions 
do not further these factors when applied to such positions. The 
Commission has considered the other section 15(a) factors and believes 
that they are not implicated by the proposed amendments.
19. Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject 
to the Provisions--Sec. Sec.  39.33, 39.36, 39.37, and Subpart C 
Election Form
a. Benefits
    Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is 
systemically important in multiple jurisdictions, or that is involved 
in activities with a more complex risk profile, to maintain financial 
resources sufficient to enable it to meet its financial obligations to 
its clearing members notwithstanding a default by the two clearing 
members creating the largest combined loss in extreme but plausible 
market conditions. The Commission is proposing to amend Sec.  
39.33(a)(1) by replacing the phrase ``largest combined loss'' with 
``largest combined financial exposure'' in order to be consistent with 
Core Principle B and Sec.  39.11(a)(1) regarding DCO financial 
resources requirements. The Commission is also proposing to amend Sec.  
39.33(c)(1) to clarify that the ``largest aggregate liquidity 
obligation'' means the total amount of cash, in each relevant currency, 
that the defaulted clearing member would be required to pay to the DCO. 
Proposed Sec.  39.33(c)(1) would reduce currency risk for SIDCOs and 
subpart C DCOs by ensuring that these DCOs have sufficient liquidity in 
the relevant currency of corresponding obligations during the time it 
would take to liquidate or auction a defaulted clearing member's 
positions. The Commission is also proposing to amend Sec.  39.33(d) to 
require that a SIDCO use available Federal Reserve Bank accounts and 
services where practical. This requirement would further enhance a 
SIDCO's financial integrity and management of liquidity risk, thereby 
promoting the financial integrity of the derivatives markets, while 
permitting SIDCOs to consider lower cost alternatives where 
appropriate.
    Furthermore, the Commission is proposing to amend Sec.  
39.36(b)(2)(ii) to replace the words ``produce accurate results'' with 
``react appropriately'' to better reflect that the purpose of a 
sensitivity analysis is to assess whether the margin model will react 
appropriately to changes of inputs, parameters, and assumptions, 
thereby enhancing the overall margin coverage. The Commission is also 
proposing to amend Sec.  39.36(d), which requires each SIDCO and 
subpart C DCO to ``regularly'' conduct an assessment of the theoretical 
and empirical properties of its margin model for all products it 
clears, to clarify that the assessment should be conducted on at least 
an annual basis or more frequently if there are material relevant 
market developments. This would ensure that SIDCOs and subpart C DCOs 
continue to test their margin model with sufficient frequency.
    Under Sec.  39.37, a SIDCO or a subpart C DCO is required to 
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework 
\92\ and, in order to ensure the continued accuracy and usefulness of 
its responses, to review and update them at least every two years and 
following material changes to the SIDCO's or subpart C DCO's system or 
environment in which it operates. The Commission is proposing to amend 
Sec.  39.37(b) to additionally require that a SIDCO or a subpart C DCO 
notify the Commission no later than ten business days after any updates 
to its responses to the CPMI-IOSCO Disclosure Framework to reflect 
material changes to the DCO's system or environment. The notice would 
need to identify changes made since the latest version of

[[Page 22264]]

the responses. The Commission is also proposing to amend Sec.  39.37(c) 
to explicitly state that a SIDCO or a subpart C DCO must disclose 
relevant basic data on transaction volume and values that are 
consistent with the standards set forth in the CPMI-IOSCO Public 
Quantitative Disclosure Standards for Central Counterparties. These 
proposed amendments would be consistent with SIDCOs' and subpart C 
DCOs' existing CPMI-IOSCO obligations.
---------------------------------------------------------------------------

    \92\ See CMPI-IOSCO, Principles for Financial Market 
Infrastructures: Disclosure Framework and Assessment Methodology 
(Dec. 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
---------------------------------------------------------------------------

    The Commission is proposing to amend the subpart C Election Form to 
better reflect the requirements in subpart C of part 39 and to more 
closely align the format of the subpart C Election Form with Form DCO 
by specifying the information and/or documentation that must be 
provided by a DCO as part of its petition for subpart C election. 
Currently, unlike Form DCO, the subpart C Election Form references the 
corresponding regulations in subpart C but does not specify the type or 
level of information that must be filed as an exhibit. The proposed 
amendments are intended to provide greater transparency and clarity as 
to the type of information required.
b. Costs
    Because most of the proposed changes to subpart C of part 39 are 
meant to clarify existing requirements, the Commission does not expect 
that SIDCOs and subpart C DCOs would incur additional costs. Where 
reporting is required under proposed Sec.  39.37(b), the Commission 
believes any cost associated with such notice would be nominal for 
SIDCOs and subpart C DCOs, as they would already be required to 
periodically update the information publicly.
c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits in light of the specific considerations 
identified in section 15(a) of the CEA. In consideration of section 
15(a)(2)(A) and (B) of the CEA, respectively, the Commission believes 
that the proposed amendments would protect market participants and the 
public, and promote the financial integrity of SIDCOs and the 
derivatives markets by, for example, clarifying SIDCO financial 
resources requirements, requiring the use of central bank accounts, 
where practical, and ensuring that SIDCOs continue to test their margin 
models with sufficient frequency. Moreover, in consideration of section 
15(a)(2)(D) of the CEA, the Commission believes the proposed amendments 
to Sec.  39.33(c)(1) would promote sound risk management policies by 
reducing currency risk for SIDCOs and subpart C DCOs by ensuring that 
these DCOs have sufficient liquidity in the relevant currency of 
corresponding obligations during the time it would take to liquidate or 
auction a defaulted clearing member's positions. The Commission has 
considered the other section 15(a) factors and believes that they are 
not implicated by the proposed amendments.
20. Part 140--Organization, Functions, and Procedures of the Commission
a. Benefits
    The Commission is proposing to amend Sec.  140.94 to provide the 
Director of the Division with delegated authority to review DCO 
registration applications, determine whether an application is 
materially complete, request additional information in support of an 
application, stay the running of the 180-day review period for an 
application, and request additional information in support of a rule 
submission. The Commission believes that DCOs would benefit from the 
proposed delegation of authority, as it would promote a more efficient 
process to address these aspects of registration and rule 
certification.
b. Costs
    The Commission has not identified any costs on DCOs or their 
members associated with the proposed amendments to Sec.  140.94.
c. Section 15(a) Factors
    The Commission has considered the section 15(a) factors and 
believes that they are not implicated by this proposed amendment.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\93\
---------------------------------------------------------------------------

    \93\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally the promotion of competition. The 
Commission requests comment on whether the proposed rulemaking 
implicates any other specific public interest to be protected by the 
antitrust laws. The Commission has considered the proposed rulemaking 
to determine whether it is anticompetitive and has identified no 
anticompetitive effects. The Commission requests comment on whether the 
proposed rulemaking is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has determined that the proposed rules are 
not anticompetitive and have no anticompetitive effects, the Commission 
has not identified any less anticompetitive means of achieving the 
purposes of the CEA. The Commission requests comment on whether there 
are less anticompetitive means of achieving the relevant purposes of 
the CEA that would otherwise be served by adopting the proposed rules.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Definitions, 
Reporting and recordkeeping requirements, Swaps.

17 CFR Part 39

    Application form, Business and industry, Commodity futures, 
Consumer protection, Default rules and procedures, Definitions, 
Enforcement authority, Participant and product eligibility, Reporting 
and recordkeeping requirements, Risk management, Settlement procedures, 
Swaps, Treatment of funds.

17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests, 
Organization and functions (Government agencies).

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

0
2. In Sec.  1.20, revise paragraphs (d)(1), (7), and (8) introductory 
text to read as follows:


Sec.  1.20  Futures customer funds to be segregated and separately 
accounted for.

* * * * *
    (d) * * *
    (1) A futures commission merchant must obtain a written 
acknowledgment from each bank, trust company, derivatives clearing 
organization, or

[[Page 22265]]

futures commission merchant prior to or contemporaneously with the 
opening of an account by the futures commission merchant with such 
depositories; provided, however, that a written acknowledgment need not 
be obtained from a derivatives clearing organization that has adopted 
and submitted to the Commission rules that provide for the segregation 
of futures customer funds in accordance with all relevant provisions of 
the Act and the rules in this chapter, and orders promulgated 
thereunder, and in such cases, the requirements set forth in paragraphs 
(d)(3) through (6) of this section shall not apply to the futures 
commission merchant.
* * * * *
    (7) Where a written acknowledgment is required, the futures 
commission merchant shall promptly file a copy of the written 
acknowledgment with the Commission in the format and manner specified 
by the Commission no later than three business days after the opening 
of the account or the execution of a new written acknowledgment for an 
existing account, as applicable.
    (8) Where a written acknowledgment is required, a futures 
commission merchant shall obtain a new written acknowledgment within 
120 days of any changes in the following:
* * * * *
0
3. In Sec.  1.59, revise paragraph (a)(1) to read as follows:


Sec.  1.59  Activities of self-regulatory organization employees, 
governing board members, committee members, and consultants.

    (a) * * *
    (1) Self-regulatory organization means a ``self-regulatory 
organization,'' as defined in Sec.  1.3.
* * * * *
0
4. In Sec.  1.63, revise paragraph (a)(1) to read as follows:


Sec.  1.63  Service on self-regulatory organization governing boards or 
committees by persons with disciplinary histories.

    (a) * * *
    (1) Self-regulatory organization means a ``self-regulatory 
organization,'' as defined in Sec.  1.3, except as defined in paragraph 
(b)(6) of this section.
* * * * *
0
5. In Sec.  1.64, revise paragraph (a)(1) to read as follows:


Sec.  1.64  Composition of various self-regulatory organization 
governing boards and major disciplinary committees.

    (a) * * *
    (1) Self-regulatory organization means ``self-regulatory 
organization,'' as defined in Sec.  1.3.
* * * * *
0
6. In Sec.  1.69, revise paragraph (a)(7) to read as follows:


Sec.  1.69  Voting by interested members of self-regulatory 
organization governing boards and various committees.

    (a) * * *
    (7) Self-regulatory organization means a ``self-regulatory 
organization,'' as defined in Sec.  1.3, but excludes registered 
futures associations for the purposes of paragraph (b)(2) of this 
section.
* * * * *

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
7. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C. 
8325.

0
8. Revise Sec.  39.2 to read as follows:


Sec.  39.2  Definitions.

    For the purposes of this part:
    Activity with a more complex risk profile includes:
    (1) Clearing credit default swaps, credit default futures, or 
derivatives that reference either credit default swaps or credit 
default futures and
    (2) Any other activity designated as such by the Commission 
pursuant to Sec.  39.33(a)(3).
    Back test means a test that compares a derivatives clearing 
organization's initial margin requirements with historical price 
changes to determine the extent of actual margin coverage.
    Business day means the intraday period of time starting at the 
business hour of 8:15 a.m. and ending at the business hour of 4:45 
p.m., on all days except Saturdays, Sundays, Federal holidays 
established under 5 U.S.C. 6103, and foreign holidays. For purposes of 
this provision, a foreign holiday is a day on which a derivatives 
clearing organization and its domestic financial markets are closed for 
a holiday that is not a Federal holiday in the United States.
    Customer account or customer origin means ``customer account'' as 
defined in Sec.  1.3 of this chapter.
    Depository institution has the meaning set forth in section 
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
    Enterprise risk management means an enterprise-wide strategic 
business process intended to identify potential events that may affect 
the enterprise and to manage the probability or impact of those events 
on the enterprise as a whole, such that the overall risk remains within 
the enterprise's risk appetite and provides reasonable assurance that 
the derivatives clearing organization can continue to achieve its 
objectives.
    Fully-collateralized position means a contract cleared by a 
derivatives clearing organization that requires the derivatives 
clearing organization to hold, at all times, funds in the form of the 
required payment sufficient to cover the maximum possible loss that a 
counterparty could incur upon liquidation or expiration of the 
contract.
    House account or house origin means a clearing member account which 
is not subject to section 4d(a) or 4d(f) of the Act.
    Key personnel means derivatives clearing organization personnel who 
play a significant role in the operations of the derivatives clearing 
organization, the provision of clearing and settlement services, risk 
management, or oversight of compliance with the Act and Commission 
regulations in this chapter, and orders promulgated thereunder. Key 
personnel include, but are not limited to, those persons who are or 
perform the functions of any of the following: Chief executive officer; 
president; chief compliance officer; chief operating officer; chief 
risk officer; chief financial officer; chief technology officer; chief 
information security officer; and emergency contacts or persons who are 
responsible for business continuity or disaster recovery planning or 
program execution.
    Stress test means a test that compares the impact of potential 
extreme price moves, changes in option volatility, and/or changes in 
other inputs that affect the value of a position, to the financial 
resources of a derivatives clearing organization, clearing member, or 
large trader, to determine the adequacy of the financial resources of 
such entities.
    Subpart C derivatives clearing organization means any derivatives 
clearing organization, as defined in section 1a(15) of the Act and 
Sec.  1.3 of this chapter, which:
    (1) Is registered as a derivatives clearing organization under 
section 5b of the Act;
    (2) Is not a systemically important derivatives clearing 
organization; and
    (3) Has become subject to the provisions of subpart C of this part, 
pursuant to Sec.  39.31.
    Systemically important derivatives clearing organization means a 
financial market utility that is a derivatives clearing organization 
registered under section 5b of the Act, which is currently designated 
by the Financial Stability Oversight Council to be systemically 
important and for which the Commission acts as the Supervisory Agency 
pursuant to 12 U.S.C. 5462(8).

[[Page 22266]]

    Trust company means a trust company that is a member of the Federal 
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C. 
221), but that does not meet the definition of depository institution 
as set out in this section.
    U.S. branch or agency of a foreign banking organization means the 
U.S. branch or agency of a foreign banking organization as defined in 
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
0
9. Revise Sec.  39.3 to read as follows:


Sec.  39.3  Procedures for registration.

    (a) Application for registration--(1) General procedure. An entity 
seeking to register as a derivatives clearing organization shall file 
an application for registration with the Secretary of the Commission in 
the format and manner specified by the Commission. The Commission will 
review the application for registration as a derivatives clearing 
organization pursuant to the 180-day timeframe and procedures specified 
in section 6(a) of the Act, and may approve or deny the application. If 
the Commission approves the application, the Commission will register 
the applicant as a derivatives clearing organization subject to 
conditions as appropriate.
    (2) Application. Any entity seeking to register as a derivatives 
clearing organization shall submit to the Commission a completed Form 
DCO, which shall include a cover sheet, all applicable exhibits, and 
any supplemental materials, as provided in appendix A to this part 
(application). The Commission will not commence processing an 
application unless the applicant has filed the application as required 
by this section. Failure to file a completed application will preclude 
the Commission from determining that an application is materially 
complete, as provided in section 6(a) of the Act. Upon its own 
initiative, an applicant may file with its completed application 
additional information that may be necessary or helpful to the 
Commission in processing the application.
    (3) Submission of supplemental information. The filing of a 
completed application is a minimum requirement and does not create a 
presumption that the application is materially complete or that 
supplemental information will not be required. At any time during the 
application review process, the Commission may request that the 
applicant provide supplemental information in order for the Commission 
to process the application. The applicant shall provide supplemental 
information in the format and manner specified by the Commission.
    (4) Application amendments. An applicant shall promptly amend its 
application if it discovers a material omission or error, or if there 
is a material change in the information provided to the Commission in 
the application or other information provided in connection with the 
application. An applicant is only required to submit exhibits and other 
information that are relevant to the application amendment when filing 
a Form DCO for the purpose of amending its pending application.
    (5) Public information. The following sections of all applications 
to become a registered derivatives clearing organization will be 
public: First page of the Form DCO cover sheet (up to and including the 
General Information section), Exhibit A-1 (regulatory compliance 
chart), Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary 
of proposed clearing activities), Exhibit A-7 (documents setting forth 
the applicant's corporate organizational structure), Exhibit A-8 
(documents establishing the applicant's legal status and certificate(s) 
of good standing or its equivalent), and any other part of the 
application not covered by a request for confidential treatment, 
subject to Sec.  145.9 of this chapter.
    (6) Extension of time for review. The Commission may further extend 
the review period in paragraph (a)(1) of this section for any period of 
time to which the applicant agrees in writing.
    (b) Stay of application review--(1) By the Commission. The 
Commission may stay the running of the 180-day review period if an 
application is materially incomplete, in accordance with section 6(a) 
of the Act.
    (2) Delegation of authority. (i) The Commission hereby delegates, 
until it orders otherwise, to the Director of the Division of Clearing 
and Risk or the Director's designee, with the concurrence of the 
General Counsel or the General Counsel's designee, the authority to 
notify an applicant seeking registration as a derivatives clearing 
organization that the application is materially incomplete and the 
running of the 180-day period under section 6(a) of the Act is stayed.
    (ii) The Director of the Division of Clearing and Risk may submit 
to the Commission for its consideration any matter which has been 
delegated in this paragraph (b)(2).
    (iii) Nothing in this paragraph (b)(2) prohibits the Commission, at 
its election, from exercising the authority delegated in paragraph 
(b)(2)(i) of this section.
    (c) Withdrawal of application for registration. An applicant for 
registration may withdraw its application submitted pursuant to 
paragraph (a) of this section by filing such a request with the 
Secretary of the Commission in the format and manner specified by the 
Commission. Withdrawal of an application for registration shall not 
affect any action taken or to be taken by the Commission based upon 
actions, activities, or events occurring during the time that the 
application for registration was pending with the Commission.
    (d) Amendment of an order of registration. (1) A derivatives 
clearing organization requesting an amendment to an order of 
registration shall file the request with the Secretary of the 
Commission in the form and manner specified by the Commission.
    (2) A derivatives clearing organization shall provide to the 
Commission, upon the Commission's request, any additional information 
and documentation necessary to review a request to amend an order of 
registration.
    (3) The Commission shall issue an amended order of registration 
upon a Commission determination, in its own discretion, that the 
derivatives clearing organization would maintain compliance with the 
Act and the Commission's regulations in this chapter upon amendment to 
the order. If deemed appropriate, the Commission may issue an amended 
order of registration subject to conditions.
    (4) The Commission may decline to issue an amended order based upon 
a Commission determination, in its own discretion, that the derivatives 
clearing organization would not continue to maintain compliance with 
the Act and the Commission's regulations in this chapter upon amendment 
to the order.
    (e) Reinstatement of dormant registration. Before accepting 
products for clearing, a dormant derivatives clearing organization as 
defined in Sec.  40.1 of this chapter must reinstate its registration 
under the procedures of paragraph (a) of this section; provided, 
however, that an application for reinstatement may rely upon previously 
submitted materials that still pertain to, and accurately describe, 
current conditions.
    (f) Vacation of registration--(1) Request. A registered derivatives 
clearing organization may have its registration vacated pursuant to 
section 7 of the Act by submitting a request to the Secretary of the 
Commission in the format and manner specified by the Commission. A 
vacation of registration shall not affect any action taken or to be

[[Page 22267]]

taken by the Commission based upon actions, activities or events 
occurring during the time that the derivatives clearing organization 
was registered with the Commission. The request shall include:
    (i) The date that the vacation should take effect, which must be at 
least ninety days after the request was submitted;
    (ii) A description of how the derivatives clearing organization 
intends to transfer or otherwise unwind all open positions at the 
derivatives clearing organization and how such actions reflect the 
interests of affected clearing members and their customers;
    (iii) A statement that the derivatives clearing organization will 
continue to maintain its books and records for the requisite statutory 
and regulatory retention periods after its registration has been 
vacated; and
    (iv) A statement that the derivatives clearing organization will 
continue to make its books and records available for inspection by any 
representative of the Commission or the United States Department of 
Justice after its registration has been vacated, as required by Sec.  
1.31 of this chapter.
    (2) Notice to registered entities. The Commission shall fulfill its 
obligation to send a copy of the request and the order of vacation to 
all other registered entities by posting the documents on the 
Commission website.
    (g) Request for transfer of open interest--(1) Submission. A 
derivatives clearing organization seeking to transfer its positions 
comprising open interest for clearing and settlement to another 
derivatives clearing organization shall submit rules for Commission 
approval pursuant to Sec.  40.5 of this chapter.
    (2) Required information. The rule submission shall include, at a 
minimum, the following:
    (i) The underlying agreement that governs the transfer;
    (ii) A description of the transfer, including the reason for the 
transfer and the impact of the transfer on the rights and obligations 
of clearing members and market participants holding the positions that 
comprise the derivatives clearing organization's open interest;
    (iii) A discussion of the transferee's ability to comply with the 
Act, including the core principles applicable to derivatives clearing 
organizations, and the Commission's regulations in this chapter;
    (iv) The transferee's rules marked to show changes that would 
result from acceptance of the transferred positions;
    (v) A list of products for which the derivatives clearing 
organization requests transfer of open interest; and
    (vi) A representation by the transferee that it is in and will 
maintain compliance with the Act, including the core principles 
applicable to derivatives clearing organizations, and the Commission's 
regulations in this chapter upon the transfer of the open interest.
    (3) Commission action. The Commission may request additional 
information in support of a rule submission filed under paragraph 
(g)(1) of this section, and may grant approval of the rules in 
accordance with Sec.  40.5 of this chapter.
0
10. In Sec.  39.4, revise paragraphs (a) and (e) to read as follows:


Sec.  39.4  Procedures for implementing derivatives clearing 
organization rules and clearing new products.

    (a) Request for approval of rules. A registered derivatives 
clearing organization may request, pursuant to the procedures of Sec.  
40.5 of this chapter, that the Commission approve any or all of its 
rules and subsequent amendments thereto, including operational rules, 
prior to their implementation or, notwithstanding the provisions of 
section 5c(c)(2) of the Act, at any time thereafter, under the 
procedures of Sec.  40.5 of this chapter. A derivatives clearing 
organization may label as ``approved by the Commission'' only those 
rules that have been so approved.
* * * * *
    (e) Holding securities in a futures portfolio margining account. A 
derivatives clearing organization seeking to provide a portfolio 
margining program under which securities would be held in a futures 
account as defined in Sec.  1.3 of this chapter, shall submit rules to 
implement such portfolio margining program for Commission approval in 
accordance with Sec.  40.5 of this chapter. Concurrent with the 
submission of such rules for Commission approval, the derivatives 
clearing organization shall petition the Commission for an order under 
section 4d(a) of the Act.
0
11. In Sec.  39.10, revise paragraphs (c)(1), (3) and (4) and add 
paragraph (d) to read as follows:


Sec.  39.10  Compliance with core principles.

* * * * *
    (c) * * *
    (1) Designation. Each derivatives clearing organization shall 
establish the position of chief compliance officer, designate an 
individual to serve as the chief compliance officer, and provide the 
chief compliance officer with full responsibility and authority to 
develop and enforce, in consultation with the board of directors or the 
senior officer, appropriate compliance policies and procedures, to 
fulfill the duties set forth in the Act and Commission regulations in 
this chapter.
    (i) The individual designated to serve as chief compliance officer 
shall have the background and skills appropriate for fulfilling the 
responsibilities of the position. No individual who would be 
disqualified from registration under sections 8a(2) or 8a(3) of the Act 
may serve as the chief compliance officer.
    (ii) The chief compliance officer shall report to the board of 
directors or the senior officer of the derivatives clearing 
organization or, if the derivatives clearing organization engages in 
substantial activities not related to clearing, the senior officer 
responsible for the derivatives clearing organization's clearing 
activities. The board of directors or the senior officer shall approve 
the compensation of the chief compliance officer.
    (iii) The chief compliance officer shall meet with the board of 
directors or the senior officer at least once a year.
    (iv) A change in the designation of the individual serving as the 
chief compliance officer of the derivatives clearing organization shall 
be reported to the Commission in accordance with the requirements of 
Sec.  39.19(c)(4)(x).
* * * * *
    (3) Annual report. The chief compliance officer shall, not less 
than annually, prepare and sign a written report that covers the most 
recently completed fiscal year of the derivatives clearing 
organization. The annual report shall, at a minimum:
    (i) Contain a description of the derivatives clearing 
organization's written policies and procedures, including the code of 
ethics and conflict of interest policies; provided that, to the extent 
that the derivatives clearing organization's written policies and 
procedures have not materially changed since they were most recently 
described in an annual report to the Commission, and if the annual 
report containing the most recent description was submitted within the 
last five years, the annual report may instead incorporate by reference 
the relevant descriptions from the most recent annual report containing 
the description;
    (ii) Review each core principle and applicable Commission 
regulation in this chapter including, in the case of systemically 
important derivatives clearing organizations and subpart C derivatives 
clearing organizations, regulations in subpart C of this part, and with 
respect to each:
    (A) Identify, by name, rule number, or other identifier, the 
compliance policies

[[Page 22268]]

and procedures that are designed to ensure compliance with each core 
principle and applicable regulation in this chapter;
    (B) Provide an assessment as to the effectiveness of these policies 
and procedures;
    (C) Discuss areas for improvement, and recommend potential or 
prospective changes or improvements to the derivatives clearing 
organization's compliance program and resources allocated to 
compliance;
    (iii) List any material changes to compliance policies and 
procedures since the last annual report;
    (iv) Describe the financial, managerial, and operational resources 
set aside for compliance with the Act and Commission regulations in 
this chapter; and
    (v) Describe any material compliance matters, including incidents 
of noncompliance, since the date of the last annual report, and 
describe the corresponding action taken.
    (4) Submission of annual report to the Commission. (i) Prior to 
submitting the annual report to the Commission, the chief compliance 
officer shall provide the annual report to the board of directors or 
the senior officer of the derivatives clearing organization or, if the 
derivatives clearing organization engages in substantial activities not 
related to clearing, the senior officer responsible for the derivatives 
clearing organization's clearing activities, for review. Submission of 
the report to the board of directors or the senior officer shall be 
recorded in the board minutes or otherwise, as evidence of compliance 
with the requirement in this paragraph (c)(4)(i). The annual report 
shall describe the process by which it was submitted to the board of 
directors or the senior officer, including the date of submission.
    (ii) The annual report shall be submitted to the Secretary of the 
Commission in the format and manner specified by the Commission not 
more than 90 days after the end of the derivatives clearing 
organization's fiscal year. The report shall include a certification by 
the chief compliance officer that, to the best of his or her knowledge 
and reasonable belief, and under penalty of law, the annual report is 
accurate and complete.
    (iii) The derivatives clearing organization shall promptly submit 
an amended annual report if material errors or omissions in the report 
are identified after submission. An amendment must contain the 
certification required under paragraph(c)(4)(ii) of this section.
    (iv) A derivatives clearing organization may request from the 
Commission an extension of time to submit its annual report in 
accordance with Sec.  39.19(c)(3).
* * * * *
    (d) Enterprise risk management--(1) General. A derivatives clearing 
organization shall have an enterprise risk management program that 
identifies and assesses sources of risk and their potential impact on 
the operations and services of the derivatives clearing organization. 
The derivatives clearing organization shall measure, monitor, and 
manage identified sources of risk on an ongoing basis, including 
through the development and use of appropriate information systems. The 
derivatives clearing organization shall test the effectiveness of any 
mitigating controls employed to reduce identified sources of risk to 
ensure that the risks are properly mitigated.
    (2) Enterprise risk management framework. A derivatives clearing 
organization shall establish and maintain written policies and 
procedures, approved by its board of directors or a committee of the 
board of directors that establish an appropriate enterprise risk 
management framework. The framework shall be reviewed at least annually 
by the board of directors or committee of the board of directors and 
updated as necessary.
    (3) Standards for enterprise risk management framework. A 
derivatives clearing organization shall follow generally accepted 
standards and industry best practices in the development and review of 
its enterprise risk management framework, assessment of the performance 
of its enterprise risk management program, and management and 
mitigation of risk to the derivatives clearing organization.
    (4) Enterprise risk officer. A derivatives clearing organization 
shall identify as its enterprise risk officer an appropriate individual 
that exercises the full responsibility and authority to manage the 
enterprise risk management program of the derivatives clearing 
organization. The enterprise risk officer shall have the authority, 
independence, resources, expertise, and access to relevant information 
necessary to fulfil the responsibilities of the position consistent 
with the requirements of this section.
0
12. Revise Sec.  39.11 to read as follows:


Sec.  39.11  Financial resources.

    (a) General. A derivatives clearing organization shall have 
adequate financial, operational, and managerial resources, as 
determined by the Commission, to discharge each responsibility of the 
derivatives clearing organization. A derivatives clearing organization 
shall maintain sufficient financial resources to cover its exposures 
with a high degree of confidence. At a minimum, each derivatives 
clearing organization shall possess financial resources that exceed the 
total amount that would:
    (1) Enable the derivatives clearing organization to meet its 
financial obligations to its clearing members notwithstanding a default 
by the clearing member creating the largest financial exposure for the 
derivatives clearing organization in extreme but plausible market 
conditions; Provided that if a clearing member controls another 
clearing member or is under common control with another clearing 
member, the affiliated clearing members shall be deemed to be a single 
clearing member for purposes of the provision in this paragraph (a)(1); 
and
    (2) Enable the derivatives clearing organization to cover its 
operating costs for a period of at least one year, calculated on a 
rolling basis. A derivatives clearing organization shall identify and 
adequately manage its general business risks and hold sufficient liquid 
resources to cover potential business losses that are not related to 
clearing members' defaults, so that the derivatives clearing 
organization can continue to provide services as a going concern.
    (b) Types of financial resources. (1) Financial resources available 
to satisfy the requirements of paragraph (a)(1) of this section may 
include:
    (i) The derivatives clearing organization's own capital;
    (ii) Guaranty fund deposits;
    (iii) Default insurance;
    (iv) Potential assessments for additional guaranty fund 
contributions, if permitted by the derivatives clearing organization's 
rules; and
    (v) Any other financial resource deemed acceptable by the 
Commission.
    (2) Financial resources available to satisfy the requirements of 
paragraph (a)(2) of this section shall include:
    (i) The derivatives clearing organization's own capital; and
    (ii) Any other financial resource deemed acceptable to the 
Commission.
    (3) A financial resource may be allocated, in whole or in part, to 
satisfy the requirements of either paragraph (a)(1) or (2) of this 
section, but not both paragraphs, and only to the extent the use of 
such financial resource is not otherwise limited by the Act, Commission 
regulations in this chapter, the derivatives clearing organization's 
rules, or any other contractual arrangements to which the derivatives 
clearing organization is a party.

[[Page 22269]]

    (c) Calculation of financial resources requirements. (1) A 
derivatives clearing organization shall, on a monthly basis, perform 
stress tests that will allow it to make a reasonable calculation of the 
financial resources needed to meet the requirements of paragraph (a)(1) 
of this section. The derivatives clearing organization shall have 
reasonable discretion in determining the methodology used to calculate 
the requirements, subject to the limitations identified in paragraph 
(c)(2) of this section, and provided that the methodology must take 
into account both historical data and hypothetical scenarios. The 
Commission may review the methodology and require changes as 
appropriate. The requirements of this paragraph (c) do not apply to 
fully-collateralized positions.
    (2) When calculating its largest financial exposure, a derivatives 
clearing organization:
    (i) In netting its exposure against the clearing member's initial 
margin, shall:
    (A) Use that portion of the margin amount on deposit that is 
required; and
    (B) Use customer initial margin only to the extent permitted by 
parts 1 and 22 of this chapter, as applicable;
    (ii) Shall combine the customer and house stress test losses of 
each clearing member using the same stress test scenarios;
    (iii) May net any gains in the house account with losses in the 
customer account, if permitted by the derivatives clearing 
organization's rules, but shall not net losses in the house account 
with gains in the customer account; and
    (iv) With respect to a clearing member's cleared swaps customer 
account, may net gains for one customer against losses for another 
customer only to the extent permitted by the derivatives clearing 
organization's rules.
    (3) A derivatives clearing organization shall, on a monthly basis, 
make a reasonable calculation of its projected operating costs over a 
12-month period in order to determine the amount needed to meet the 
requirements of paragraph (a)(2) of this section. The derivatives 
clearing organization shall have reasonable discretion in determining 
the methodology used to compute such projected operating costs. The 
Commission may review the methodology and require changes as 
appropriate.
    (d) Valuation of financial resources. (1) At appropriate intervals, 
but not less than monthly, a derivatives clearing organization shall 
compute the current market value of each financial resource used to 
meet its obligations under paragraph (a) of this section. Reductions in 
value to reflect credit, market, and liquidity risks (haircuts) shall 
be applied as appropriate and evaluated on a monthly basis.
    (2) If assessments for additional guaranty fund contributions are 
permitted by the derivatives clearing organization's rules, in 
calculating the financial resources available to meet its obligations 
under paragraph (a)(1) of this section:
    (i) The derivatives clearing organization shall have rules 
requiring that its clearing members have the ability to meet an 
assessment within the time frame of a normal end-of-day variation 
settlement cycle;
    (ii) The derivatives clearing organization shall monitor the 
financial and operational capacity of its clearing members to meet 
potential assessments;
    (iii) The derivatives clearing organization shall apply a 30 
percent haircut to the value of potential assessments; and
    (iv) The derivatives clearing organization shall only count the 
value of assessments, after the haircut, to meet up to 20 percent of 
the total amount required under paragraph (a)(1) of this section.
    (e) Liquidity of financial resources. (1)(i) The derivatives 
clearing organization shall effectively measure, monitor, and manage 
its liquidity risks, maintaining sufficient liquid resources such that 
it can, at a minimum, fulfill its cash obligations when due. The 
derivatives clearing organization shall hold assets in a manner where 
the risk of loss or of delay in its access to them is minimized.
    (ii) The financial resources allocated by the derivatives clearing 
organization to meet the requirements of paragraph (a)(1) of this 
section shall be sufficiently liquid to enable the derivatives clearing 
organization to fulfill its obligations as a central counterparty 
during a one-day settlement cycle. The derivatives clearing 
organization shall maintain cash, U.S. Treasury obligations, or high 
quality, liquid, general obligations of a sovereign nation, in an 
amount greater than or equal to an amount calculated as follows:
    (A) Calculate the average daily settlement variation pay for each 
clearing member over the last fiscal quarter;
    (B) Calculate the sum of those average daily settlement variation 
pays; and
    (C) Using that sum, calculate the average of its clearing members' 
average daily settlement variation pays.
    (iii) If the total amount of the financial resources required 
pursuant to the calculation set forth in paragraph (e)(1)(ii) of this 
section is insufficient to enable the derivatives clearing organization 
to fulfill its obligations during a one-day settlement cycle, the 
derivatives clearing organization may take into account a committed 
line of credit or similar facility for the purpose of meeting the 
remainder of the requirement of this paragraph (e) (subject to the 
limitation in paragraph (e)(3) of this section).
    (iv) A derivatives clearing organization is not subject to 
paragraph (e)(1)(ii) of this section for fully-collateralized 
positions.
    (2) The financial resources allocated by the derivatives clearing 
organization to meet the requirements of paragraph (a)(2) of this 
section must include unencumbered, liquid financial assets (i.e., cash 
and/or highly liquid securities) sufficient to enable the derivatives 
clearing organization to cover its operating costs for a period of at 
least six months. If the financial resources allocated to meet the 
requirements of paragraph (a)(2) of this section do not include such 
assets in a sufficient amount, the derivatives clearing organization 
may take into account a committed line of credit or similar facility 
for the purpose of meeting the requirements of this paragraph (subject 
to the limitation in paragraph (e)(3) of this section).
    (3) A committed line of credit or similar facility may be 
allocated, in whole or in part, to satisfy the requirements of either 
paragraph (e)(1)(ii) or (e)(2) of this section, but not both 
paragraphs.
    (4)(i) Assets in a guaranty fund shall have minimal credit, market, 
and liquidity risks and shall be readily accessible on a same-day 
basis;
    (ii) Cash balances shall be invested or placed in safekeeping in a 
manner that bears little or no principal risk; and
    (iii) Letters of credit shall not be a permissible asset for a 
guaranty fund.
    (f) Reporting requirements--(1) Quarterly reporting. Each fiscal 
quarter, or at any time upon Commission request, a derivatives clearing 
organization shall:
    (i) Report to the Commission:
    (A) The amount of financial resources necessary to meet the 
requirements of paragraph (a) of this section and Sec. Sec.  39.33(a) 
and 39.39(d), if applicable;
    (B) The value of each financial resource available, computed in 
accordance with the requirements of paragraph (d) of this section; and
    (C) The manner in which the derivatives clearing organization meets 
the liquidity requirements of paragraph (e) of this section.
    (ii) Provide the Commission with a financial statement, including 
the balance sheet, income statement, and

[[Page 22270]]

statement of cash flows, prepared in accordance with U.S. generally 
accepted accounting principles, of the derivatives clearing 
organization; provided, however, that for a derivatives clearing 
organization that is incorporated or organized under the laws of any 
foreign country, the financial statement may be prepared in accordance 
with either U.S. generally accepted accounting principles or the 
International Financial Reporting Standards issued by the International 
Accounting Standards Board. The balance sheet must identify any assets 
allocated to satisfy the requirements of paragraph (a)(1) or (2) of 
this section as held for that purpose; and
    (iii) Report to the Commission the value of each individual 
clearing member's guaranty fund deposit, if the derivatives clearing 
organization reports having guaranty fund deposits as a financial 
resource available to satisfy the requirements of paragraph (a)(1) of 
this section and Sec. Sec.  39.33(a) and 39.39(d), if applicable.
    (iv) The calculations required by this paragraph (f) shall be made 
as of the last business day of the derivatives clearing organization's 
fiscal quarter. The report shall be submitted not later than 17 
business days after the end of the derivatives clearing organization's 
fiscal quarter, or at such later time as the Commission may permit, in 
its discretion, upon request by the derivatives clearing organization.
    (2) Annual reporting. (i) A derivatives clearing organization shall 
submit to the Commission an audited year-end financial statement of the 
derivatives clearing organization calculated in accordance with U.S. 
generally accepted accounting principles; provided, however, that for a 
derivatives clearing organization that is incorporated or organized 
under the laws of any foreign country, the financial statement may be 
prepared in accordance with either U.S. generally accepted accounting 
principles or the International Financial Reporting Standards issued by 
the International Accounting Standards Board. The balance sheet must 
identify any assets allocated to satisfy the requirements of paragraph 
(a)(1) or (2) of this section as held for that purpose.
    (ii) The report required by paragraph (f)(2)(i) of this section 
shall be submitted not later than 90 days after the end of the 
derivatives clearing organization's fiscal year, or at such later time 
as the Commission may permit, in its discretion, upon request by the 
derivatives clearing organization.
    (iii) A derivatives clearing organization shall submit concurrently 
with the audited year-end financial statement required by paragraph 
(f)(2)(i) of this section:
    (A) A reconciliation, including appropriate explanations, of its 
balance sheet in the audited year-end financial statement with the 
balance sheet in the derivatives clearing organization's financial 
statement for the last quarter of the fiscal year when material 
differences exist or, if no material differences exist, a statement so 
indicating; and
    (B) Such further information as may be necessary to make the 
statements not misleading.
    (3) Other reporting. (i) A derivatives clearing organization shall 
provide to the Commission as part of its first report under paragraph 
(f)(1) of this section, and in the event of any change thereafter:
    (A) Sufficient documentation explaining the methodology used to 
compute its financial resources requirements under paragraph (a) of 
this section and Sec. Sec.  39.33(a) and 39.39(d), if applicable; and
    (B) Sufficient documentation explaining the basis for its 
determinations regarding the valuation and liquidity requirements set 
forth in paragraphs (d) and (e) of this section.
    (ii) A derivatives clearing organization shall provide to the 
Commission copies of any agreements establishing or amending a credit 
facility, insurance coverage, or other arrangement evidencing or 
otherwise supporting the derivatives clearing organization's 
conclusions regarding its:
    (A) Financial resources available to satisfy the requirements of 
paragraph (a) of this section and Sec. Sec.  39.33(a) and 39.39(d), if 
applicable; and
    (B) Liquidity resources available to satisfy the requirements of 
paragraph (e) of this section and Sec.  39.33(c), if applicable.
    (4) Certification. A derivatives clearing organization shall 
provide with each report submitted pursuant to this section a 
certification by the person responsible for the accuracy and 
completeness of the report that, to the best of his or her knowledge 
and reasonable belief, and under penalty of law, the information 
contained in the report is accurate and complete.
0
13. In Sec.  39.12, revise paragraphs (a) introductory text, (a)(1) 
introductory text, (a)(1)(i), (a)(4), (5) and (6), (b)(1) introductory 
text, and (b)(2) to read as follows:


Sec.  39.12  Participant and product eligibility.

    (a) Participant eligibility. A derivatives clearing organization 
shall have appropriate admission and continuing participation 
requirements for clearing members of the derivatives clearing 
organization that are objective, publicly disclosed, and risk-based.
    (1) Fair and open access for participation. The participation 
requirements shall permit fair and open access.
    (i) A derivatives clearing organization shall not have restrictive 
clearing member standards if less restrictive requirements that achieve 
the same objective and that would not materially increase risk to the 
derivatives clearing organization or clearing members could be adopted;
* * * * *
    (4) Monitoring. A derivatives clearing organization shall have 
procedures to verify, on an ongoing basis, the compliance of each 
clearing member with each participation requirement of the derivatives 
clearing organization.
    (5) Reporting. (i) A derivatives clearing organization shall 
require all clearing members, including non-futures commission 
merchants, to provide to the derivatives clearing organization periodic 
financial reports that contain any financial information that the 
derivatives clearing organization determines is necessary to assess 
whether participation requirements are being met on an ongoing basis.
    (ii) A derivatives clearing organization shall require clearing 
members that are futures commission merchants to provide the financial 
reports that are specified in Sec.  1.10 of this chapter to the 
derivatives clearing organization.
    (iii) A derivatives clearing organization shall require clearing 
members that are not futures commission merchants to make the periodic 
financial reports provided pursuant to paragraph (a)(5)(i) of this 
section available to the Commission upon the Commission's request or, 
in lieu of imposing the requirement in this paragraph (a)(5)(iii), a 
derivatives clearing organization may provide such financial reports 
directly to the Commission upon the Commission's request.
    (iv) A derivatives clearing organization shall have rules that 
require clearing members to provide to the derivatives clearing 
organization, in a timely manner, information that concerns any 
financial or business developments that may materially affect the 
clearing members' ability to continue to comply with participation 
requirements under this section.
    (v) The requirements in paragraphs (a)(5)(i) and (iii) of this 
section shall not apply with respect to non-futures commission merchant 
clearing members of a derivatives clearing organization

[[Page 22271]]

that only clear fully-collateralized positions.
    (6) Enforcement. A derivatives clearing organization shall have the 
ability to enforce compliance with its participation requirements and 
shall have procedures for the suspension and orderly removal of 
clearing members that no longer meet the requirements.
    (b) * * *
    (1) A derivatives clearing organization shall have appropriate 
requirements for determining the eligibility of agreements, contracts, 
or transactions submitted to the derivatives clearing organization for 
clearing, taking into account the derivatives clearing organization's 
ability to manage the risks associated with such agreements, contracts, 
or transactions. Factors to be considered in determining product 
eligibility include, but are not limited to:
* * * * *
    (2) A derivatives clearing organization that clears swaps shall 
have rules providing that all swaps with the same terms and conditions, 
as defined by product specifications established under derivatives 
clearing organization rules, submitted to the derivatives clearing 
organization for clearing are economically equivalent within the 
derivatives clearing organization and may be offset with each other 
within the derivatives clearing organization.
* * * * *
0
14. In Sec.  39.13, revise paragraphs (b), (f), (g)(2)(i), (g)(3), 
(g)(4)(i) introductory text, (g)(7), (8) and (12), (h)(1)(i) 
introductory text, and (h)(3) and (5) and add paragraph (i) to read as 
follows:


Sec.  39.13  Risk management.

* * * * *
    (b) Risk management framework. A derivatives clearing organization 
shall have and implement written policies, procedures, and controls, 
approved by its board of directors, that establish an appropriate risk 
management framework that, at a minimum, clearly identifies and 
documents the range of risks to which the derivatives clearing 
organization is exposed, addresses the monitoring and management of the 
entirety of those risks, and provides a mechanism for internal audit. 
The risk management framework shall be regularly reviewed and updated 
as necessary.
* * * * *
    (f) Limitation of exposure to potential losses from defaults. A 
derivatives clearing organization, through margin requirements and 
other risk control mechanisms, shall limit its exposure to potential 
losses from defaults by its clearing members to minimize the risk that:
    (1) The operations of the derivatives clearing organization would 
be disrupted; and
    (2) Non-defaulting clearing members would be exposed to losses that 
non-defaulting clearing members cannot anticipate or control.
    (g) * * *
    (2) * * *
    (i) A derivatives clearing organization shall have initial margin 
requirements that are commensurate with the risks of each product and 
portfolio, including any unusual characteristics of, or risks 
associated with, particular products or portfolios, including but not 
limited to jump-to-default risk or similar jump risk, and concentration 
of positions.
* * * * *
    (3) Independent validation. A derivatives clearing organization 
shall have its systems for generating initial margin requirements, 
including its theoretical models, reviewed and validated by a qualified 
and independent party on an annual basis. Such qualified and 
independent parties may be independent contractors or employees of the 
derivatives clearing organization, or of an affiliate of the 
derivatives clearing organization, but shall not be persons responsible 
for development or operation of the systems and models being tested.
    (4) * * *
    (i) A derivatives clearing organization may allow reductions in 
initial margin requirements for related positions if the price risks 
with respect to such positions are significantly and reliably 
correlated. The price risks of different positions will only be 
considered to be reliably correlated if there is a conceptual basis for 
the correlation in addition to an exhibited statistical correlation. 
That conceptual basis may include, but is not limited to, the 
following:
* * * * *
    (7) Back tests. A derivatives clearing organization shall conduct 
back tests, as defined in Sec.  39.2, using an appropriate time period 
but not less than the previous 30 days, as follows:
    (i) On a daily basis, a derivatives clearing organization shall 
conduct back tests with respect to products or swap portfolios that are 
experiencing significant market volatility, to test the adequacy of its 
initial margin requirements, as follows:
    (A) For that product if the derivatives clearing organization uses 
a product-based margin methodology;
    (B) For each spread involving that product if there is a defined 
spread margin rate;
    (C) For each account held by a clearing member at the derivatives 
clearing organization that contains a significant position in that 
product, by house origin and by each customer origin; and
    (D) For each such swap portfolio, including any portfolio 
containing futures and/or options and held in a commingled account 
pursuant to Sec.  39.15(b)(2), by beneficial owner.
    (ii) On at least a monthly basis, a derivatives clearing 
organization shall conduct back tests to test the adequacy of its 
initial margin requirements, as follows:
    (A) For each product for which the derivatives clearing 
organization uses a product-based margin methodology;
    (B) For each spread for which there is a defined spread margin 
rate;
    (C) For each account held by a clearing member at the derivatives 
clearing organization, by house origin and by each customer origin; and
    (D) For each swap portfolio, including any portfolio containing 
futures and/or options and held in a commingled account pursuant to 
Sec.  39.15(b)(2), by beneficial owner.
    (iii) In conducting back tests of initial margin requirements, a 
derivatives clearing organization shall compare portfolio losses only 
to those components of initial margin that capture changes in market 
risk factors.
    (8) Customer margin--(i) Gross margin. (A) During the end-of-day 
settlement cycle, a derivatives clearing organization shall collect 
initial margin on a gross basis for each clearing member's customer 
account(s) equal to the sum of the initial margin amounts that would be 
required by the derivatives clearing organization for each individual 
customer within that account if each individual customer were a 
clearing member.
    (B) For purposes of calculating the gross initial margin 
requirement for each clearing member's customer account(s), a 
derivatives clearing organization shall have rules that require its 
clearing members to provide to the derivatives clearing organization 
reports each day setting forth end-of-day gross positions of each 
beneficial owner within each customer origin of the clearing member.
    (C) A derivatives clearing organization may not, and may not permit 
its clearing members to, net positions of different customers against 
one another.
    (D) A derivatives clearing organization may collect initial margin 
for its clearing members' house accounts on a net basis.
    (ii) Customer initial margin requirements. A derivatives clearing

[[Page 22272]]

organization shall require its clearing members to collect customer 
initial margin at a level that is not less than 100 percent of the 
derivatives clearing organization's clearing initial margin 
requirements with respect to each product and portfolio and 
commensurate with the risk presented by each customer account. The 
derivatives clearing organization shall have reasonable discretion in 
determining whether and by how much such customer initial margin 
requirements must exceed the derivatives clearing organization's 
clearing initial margin requirements with respect to particular 
products or portfolios. The Commission may review such customer initial 
margin levels and require different levels if the Commission deems the 
levels insufficient to protect the financial integrity of the 
derivatives clearing organization or its clearing members.
    (iii) Withdrawal of customer initial margin. A derivatives clearing 
organization shall require its clearing members to ensure that their 
customers do not withdraw funds from their accounts with such clearing 
members unless the net liquidating value plus the margin deposits 
remaining in a customer's account after such withdrawal are sufficient 
to meet the customer initial margin requirements with respect to all 
products and swap portfolios held in such customer's account which are 
cleared by the derivatives clearing organization.
* * * * *
    (12) Haircuts. A derivatives clearing organization shall apply 
appropriate reductions in value to reflect credit, market, and 
liquidity risks (haircuts), to the assets that it accepts in 
satisfaction of initial margin obligations, taking into consideration 
stressed market conditions, and shall evaluate the appropriateness of 
the haircuts on at least a monthly basis.
* * * * *
    (h) * * *
    (1) * * *
    (i) A derivatives clearing organization shall impose risk limits on 
each clearing member, by house origin and by each customer origin, in 
order to prevent a clearing member from carrying positions for which 
the risk exposure exceeds a specified threshold relative to the 
clearing member's and/or the derivatives clearing organization's 
financial resources, and to address positions that may be difficult to 
liquidate. The derivatives clearing organization shall have reasonable 
discretion in determining:
* * * * *
    (3) Stress tests. A derivatives clearing organization shall conduct 
stress tests, as defined in Sec.  39.2, as follows:
    (i) On a daily basis, a derivatives clearing organization shall 
conduct stress tests with respect to each large trader who poses 
significant risk to a clearing member or the derivatives clearing 
organization, including futures, options, and swaps cleared by the 
derivatives clearing organization, which are held by all clearing 
members carrying accounts for each such large trader. The derivatives 
clearing organization shall have reasonable discretion in determining 
which traders to test and the methodology used to conduct such stress 
tests. The Commission may review the selection of accounts and the 
methodology and require changes, as appropriate.
    (ii) On at least a weekly basis, a derivatives clearing 
organization shall conduct stress tests with respect to each clearing 
member account, by house origin and by each customer origin, and each 
swap portfolio, including any portfolio containing futures and/or 
options and held in a commingled account pursuant to Sec.  39.15(b)(2), 
by beneficial owner, under extreme but plausible market conditions. The 
derivatives clearing organization shall have reasonable discretion in 
determining the methodology used to conduct such stress tests. The 
Commission may review the methodology and require changes, as 
appropriate.
    (iii) The requirements in paragraphs (h)(3)(i) and (ii) of this 
section do not apply with respect to clearing member accounts that hold 
only fully-collateralized positions.
* * * * *
    (5) Clearing members' risk management policies and procedures. (i) 
A derivatives clearing organization shall have rules that:
    (A) Require its clearing members to maintain current written risk 
management policies and procedures, which address the risks that such 
clearing members may pose to the derivatives clearing organization;
    (B) Ensure that it has the authority to request and obtain 
information and documents from its clearing members regarding their 
risk management policies, procedures, and practices, including, but not 
limited to, information and documents relating to the liquidity of 
their financial resources and their settlement procedures; and
    (C) Require its clearing members to make information and documents 
regarding their risk management policies, procedures, and practices 
available to the Commission upon the Commission's request.
    (ii) A derivatives clearing organization shall review the risk 
management policies, procedures, and practices of each of its clearing 
members, which address the risks that such clearing members may pose to 
the derivatives clearing organization, on a periodic basis, take 
appropriate action to address concerns identified in such reviews, and 
document such reviews and the basis for determining what action was 
appropriate to take.
* * * * *
    (i) Cross-margining. (1) A derivatives clearing organization that 
seeks to implement a cross-margining program with one or more clearing 
organizations shall file rules for Commission approval pursuant to 
Sec.  40.5 of this chapter that contain, at a minimum, the following 
information:
    (i) Identification of the products that would be eligible for 
cross-margining, including product specifications or criteria that 
would be used to define eligible products;
    (ii) Analysis of the risk characteristics of the eligible products;
    (iii) Analysis of the liquidity of the respective markets for the 
eligible products, including the ability of clearing members and the 
derivatives clearing organization to offset or mitigate the risk of 
such products in a timely manner and proposed means for addressing 
insufficient liquidity;
    (iv) Analysis of the availability of reliable prices for each of 
the eligible products;
    (v) Financial and operational requirements that would apply to 
clearing members participating in the program;
    (vi) A description and analysis of the margin methodology that 
would be used to calculate initial margin requirements, including:
    (A) Any margin reduction applied to correlated positions; and
    (B) Information regarding the correlations between eligible 
products, including the stability of the relationship among the 
eligible products and the potential impact a change in the correlations 
could have on setting initial margin requirements;
    (vii) Procedures the derivatives clearing organization would follow 
in the event of a clearing member default, including any loss-sharing 
arrangements;
    (viii) A description of the arrangements for obtaining daily 
position data with respect to products in the account;
    (ix) Whether funds to support the cross-margined positions will be

[[Page 22273]]

maintained together in one account or in separate accounts at each 
participating clearing organization; and
    (x) A copy of the agreement between the clearing organizations 
participating in the cross-margining program.
    (2) The Commission may request additional information in support of 
a rule submission filed under this paragraph (i), and may approve such 
rules in accordance with Sec.  40.5 of this chapter.
0
15. Revise Sec.  39.15 to read as follows:


Sec.  39.15  Treatment of funds.

    (a) Required standards and procedures. A derivatives clearing 
organization shall establish standards and procedures that are designed 
to protect and ensure the safety of funds and assets belonging to 
clearing members and their customers.
    (b) Customer funds--(1) Segregation. A derivatives clearing 
organization shall comply with the applicable segregation requirements 
of section 4d of the Act and Commission regulations in this part, or 
any other applicable Commission regulation in this chapter or order 
requiring that customer funds and assets, including money, securities, 
and property, be segregated, set aside, or held in a separate account.
    (2) Commingling--(i) Cleared swaps account. In order for a 
derivatives clearing organization and its clearing members to commingle 
customer positions in futures, options, foreign futures, foreign 
options, and swaps, or any combination thereof, and any money, 
securities, or property received to margin, guarantee or secure such 
positions, in an account subject to the requirements of section 4d(f) 
of the Act, the derivatives clearing organization shall file rules for 
Commission approval pursuant to Sec.  40.5 of this chapter. Such rule 
submission shall include, at a minimum, the following:
    (A) Identification of the products that would be commingled, 
including product specifications or the criteria that would be used to 
define eligible products;
    (B) Analysis of the risk characteristics of the eligible products;
    (C) Identification of whether the swaps would be executed 
bilaterally and/or executed on a designated contract market and/or a 
swap execution facility;
    (D) Analysis of the liquidity of the respective markets for the 
eligible products, the ability of clearing members and the derivatives 
clearing organization to offset or mitigate the risk of such eligible 
products in a timely manner, without compromising the financial 
integrity of the account, and, as appropriate, proposed means for 
addressing insufficient liquidity;
    (E) Analysis of availability of reliable prices for each of the 
eligible products;
    (F) A description of the financial, operational, and managerial 
standards or requirements for clearing members that would be permitted 
to commingle eligible products;
    (G) A description of the systems and procedures that would be used 
by the derivatives clearing organization to oversee such clearing 
members' risk management of any such commingled positions;
    (H) A description of the financial resources of the derivatives 
clearing organization, including the composition and availability of a 
guaranty fund with respect to the eligible products that would be 
commingled;
    (I) A description and analysis of the margin methodology that would 
be applied to the commingled eligible products, including any margin 
reduction applied to correlated positions, and any applicable margin 
rules with respect to both clearing members and customers;
    (J) An analysis of the ability of the derivatives clearing 
organization to manage a potential default with respect to any of the 
eligible products that would be commingled;
    (K) A discussion of the procedures that the derivatives clearing 
organization would follow if a clearing member defaulted, and the 
procedures that a clearing member would follow if a customer defaulted, 
with respect to any of the commingled eligible products in the account; 
and
    (L) A description of the arrangements for obtaining daily position 
data with respect to eligible products in the account.
    (ii) Futures account. In order for a derivatives clearing 
organization and its clearing members to commingle customer positions 
in futures, options, foreign futures, foreign options, and swaps, or 
any combination thereof, and any money, securities, or property 
received to margin, guarantee or secure such positions, in an account 
subject to the requirements of section 4d(a) of the Act, the 
derivatives clearing organization shall file rules for Commission 
approval pursuant to Sec.  40.5 of this chapter. Such rule submission 
shall include, at a minimum, the information required under paragraph 
(b)(2)(i) of this section.
    (iii) Commission action. The Commission may request additional 
information in support of a rule submission filed under paragraph 
(b)(2)(i) or (ii) of this section, and may approve such rules in 
accordance with Sec.  40.5 of this chapter.
    (c) Holding of funds and assets. A derivatives clearing 
organization shall hold funds and assets belonging to clearing members 
and their customers in a manner which minimizes the risk of loss or of 
delay in the access by the derivatives clearing organization to such 
funds and assets.
    (d) Transfer of customer positions. A derivatives clearing 
organization shall have rules providing that the derivatives clearing 
organization will promptly transfer all or a portion of a customer's 
portfolio of positions, and related funds as necessary, from the 
carrying clearing member of the derivatives clearing organization to 
another clearing member of the derivatives clearing organization, 
without requiring the close-out and re-booking of the positions prior 
to the requested transfer, subject to the following conditions:
    (1) The customer has instructed the carrying clearing member to 
make the transfer;
    (2) The customer is not currently in default to the carrying 
clearing member;
    (3) The transferred positions will have appropriate margin at the 
receiving clearing member;
    (4) Any remaining positions will have appropriate margin at the 
carrying clearing member; and
    (5) The receiving clearing member has consented to the transfer.
    (e) Permitted investments. Funds and assets belonging to clearing 
members and their customers that are invested by a derivatives clearing 
organization shall be held in instruments with minimal credit, market, 
and liquidity risks. Any investment of customer funds or assets, 
including cleared swaps customer collateral, as defined in Sec.  22.1 
of this chapter, by a derivatives clearing organization shall comply 
with Sec.  1.25 of this chapter.
0
16. Revise Sec.  39.16 to read as follows:


Sec.  39.16  Default rules and procedures.

    (a) General. A derivatives clearing organization shall have rules 
and procedures designed to allow for the efficient, fair, and safe 
management of events during which clearing members become insolvent or 
default on the obligations of such clearing members to the derivatives 
clearing organization.
    (b) Default management plan. A derivatives clearing organization 
shall maintain a current written default management plan that 
delineates the roles and responsibilities of its board of directors, 
its risk management committee, any other committee that a derivatives 
clearing organization may have that has responsibilities for default

[[Page 22274]]

management, and the derivatives clearing organization's management, in 
addressing a default, including any necessary coordination with, or 
notification of, other entities and regulators. Such plan shall address 
any differences in procedures with respect to highly liquid products 
and less liquid products. A derivatives clearing organization shall 
conduct and document a test of its default management plan at least on 
an annual basis. The derivatives clearing organization shall include 
clearing members in a test of its default management plan at least on 
an annual basis.
    (c) Default procedures. (1) A derivatives clearing organization 
shall have procedures that would permit the derivatives clearing 
organization to take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
default on the obligations of a clearing member to the derivatives 
clearing organization. The derivatives clearing organization shall have 
a default committee that would be convened in the event of a default 
involving substantial or complex positions to help identify market 
issues with any action the derivatives clearing organization is 
considering. The default committee shall include clearing members and 
may include other participants to help the derivatives clearing 
organization efficiently manage the house or customer positions of the 
defaulting clearing member.
    (2) A derivatives clearing organization shall have rules that set 
forth its default procedures, including:
    (i) The derivatives clearing organization's definition of a 
default;
    (ii) The actions that the derivatives clearing organization may 
take upon a default, which shall include immediate public notice of a 
declaration of default on its website and the prompt transfer, 
liquidation, or hedging of the customer or house positions of the 
defaulting clearing member, as applicable, and which may include, in 
the discretion of the derivatives clearing organization, the auctioning 
or allocation of such positions to other clearing members;
    (iii) Any obligations that the derivatives clearing organization 
imposes on its clearing members to participate in auctions, or to 
accept allocations, of the customer or house positions of the 
defaulting clearing member, provided that:
    (A) The derivatives clearing organization shall permit a clearing 
member to outsource to a qualified third party, authority to act in the 
clearing member's place in any auction, subject to appropriate 
safeguards imposed by the derivatives clearing organization;
    (B) The derivatives clearing organization shall permit a clearing 
member to outsource to a qualified third party, authority to act in the 
clearing member's place in any allocations, subject to appropriate 
safeguards imposed by the derivatives clearing organization; and
    (C) The derivatives clearing organization shall not require a 
clearing member to bid for a portion of, or accept an allocation of, 
the defaulting clearing member's positions that is not proportional to 
the size of the bidding or accepting clearing member's positions in the 
same product class at the derivatives clearing organization, as 
measured by the clearing initial margin requirement for those 
positions;
    (iv) The sequence in which the funds and assets of the defaulting 
clearing member and its customers and the financial resources 
maintained by the derivatives clearing organization would be applied in 
the event of a default;
    (v) A provision that the funds and assets of a defaulting clearing 
member's customers shall not be applied to cover losses with respect to 
a house default; and
    (vi) A provision that the excess house funds and assets of a 
defaulting clearing member shall be applied to cover losses with 
respect to a customer default, if the relevant customer funds and 
assets are insufficient to cover the shortfall.
    (3) A derivatives clearing organization shall make its default 
rules publicly available as provided in Sec.  39.21.
    (d) Insolvency of a clearing member. (1) A derivatives clearing 
organization shall have rules that require a clearing member to provide 
prompt notice to the derivatives clearing organization if it becomes 
the subject of a bankruptcy petition, receivership proceeding, or the 
equivalent;
    (2) No later than upon receipt of such notice, a derivatives 
clearing organization shall review the continuing eligibility of the 
clearing member for clearing membership; and
    (3) No later than upon receipt of such notice, a derivatives 
clearing organization shall take any appropriate action, in its 
discretion, with respect to such clearing member or its house or 
customer positions, including but not limited to liquidation or 
transfer of positions, suspension, or revocation of clearing 
membership.
0
17. Revise Sec.  39.17 to read as follows:


Sec.  39.17  Rule enforcement.

    (a) General. A derivatives clearing organization shall:
    (1) Maintain adequate arrangements and resources for the effective 
monitoring and enforcement of compliance (by itself and its clearing 
members) with the rules of the derivatives clearing organization and 
the resolution of disputes;
    (2) Have the authority and ability to discipline, limit, suspend, 
or terminate the activities of a clearing member due to a violation by 
the clearing member of any rule of the derivatives clearing 
organization; and
    (3) Report to the Commission regarding rule enforcement activities 
and sanctions imposed against clearing members as provided in paragraph 
(a)(2) of this section, in accordance with Sec.  39.19(c)(4)(xvii).
    (b) Authority to enforce rules. The board of directors of the 
derivatives clearing organization may delegate responsibility for 
compliance with the requirements of paragraph (a) of this section to an 
appropriate committee, unless the responsibilities are otherwise 
required to be carried out by the chief compliance officer pursuant to 
the Act or this part.
0
18. Revise Sec.  39.19 to read as follows:


Sec.  39.19  Reporting.

    (a) General. A derivatives clearing organization shall provide to 
the Commission the information specified in this section and any other 
information that the Commission determines to be necessary to conduct 
oversight of the derivatives clearing organization.
    (b) Submission of reports--(1) General requirement. A derivatives 
clearing organization shall submit the information required by this 
section to the Commission in a format and manner specified by the 
Commission.
    (2) Certification. When making a submission pursuant to this 
section, an employee of the derivatives clearing organization must 
certify that he or she is duly authorized to make such a submission on 
behalf of the derivatives clearing organization.
    (3) Time zones. Unless otherwise specified by the Commission or its 
designee, any stated time in this section is Central time for 
information concerning derivatives clearing organizations located in 
that time zone, and Eastern time for information concerning all other 
derivatives clearing organizations.
    (c) Reporting requirements. Each registered derivatives clearing 
organization shall provide to the Commission or other person as may be 
required or permitted by this paragraph (c) the information specified 
as follows:

[[Page 22275]]

    (1) Daily reporting. (i) A derivatives clearing organization shall 
compile as of the end of each trading day, and submit to the Commission 
by 10:00 a.m. on the next business day, a report containing the 
following information related to all positions other than fully-
collateralized positions:
    (A) Initial margin requirements and initial margin on deposit for 
each clearing member, by house origin and by each customer origin, and 
by each individual customer account;
    (B) Daily variation margin, separately listing the mark-to-market 
amount collected from or paid to each clearing member, by house origin 
and by each customer origin, and by each individual customer account;
    (C) All other daily cash flows relating to clearing and settlement 
including, but not limited to, option premiums and payments related to 
swaps such as coupon amounts, collected from or paid to each clearing 
member, by house origin and by each customer origin, and by each 
individual customer account; and
    (D) End-of-day positions, including as appropriate the risk 
sensitivities and valuation data for such positions, for each clearing 
member, by house origin and by each customer origin, and by each 
individual customer account. The derivatives clearing organization 
shall identify each individual customer account using both a legal 
entity identifier and any internally-generated identifier, where 
applicable, within each customer origin for each clearing member.
    (ii) The report shall contain the information required by 
paragraphs (c)(1)(i)(A) through (D) of this section for:
    (A) All futures positions, and options positions, as applicable;
    (B) All swaps positions; and
    (C) All securities positions that are:
    (1) Held in a customer account subject to section 4d of the Act; or
    (2) Subject to a cross-margining agreement.
    (2) Quarterly reporting. A derivatives clearing organization shall 
provide to the Commission each fiscal quarter, or at any time upon 
Commission request, a report of the derivatives clearing organization's 
financial resources as required by Sec.  39.11(f)(1).
    (3) Annual reporting. A derivatives clearing organization shall 
provide to the Commission each year:
    (i) The annual report of the chief compliance officer required by 
Sec.  39.10; and
    (ii) Audited year-end financial statements of the derivatives 
clearing organization as required by Sec.  39.11(f)(2).
    (iii) [Reserved]
    (iv) The reports required by this paragraph (c)(3) shall be filed 
not later than 90 days after the end of the derivatives clearing 
organization's fiscal year, or at such later time as the Commission may 
permit, in its discretion, upon request by the derivatives clearing 
organization.
    (4) Event specific reporting--(i) Decrease in financial resources. 
If there is a decrease of 25 percent or more in the total value of the 
financial resources available to satisfy the requirements under Sec.  
39.11(a)(1) or Sec.  39.33(a), as applicable, either from the last 
quarterly report submitted under Sec.  39.11(f) or from the value as of 
the close of the previous business day, a derivatives clearing 
organization shall report such decrease to the Commission no later than 
one business day following the day the 25 percent threshold was 
reached. The report shall include:
    (A) The total value of the financial resources as of the close of 
business the day the 25 percent threshold was reached;
    (B) If reporting a decrease in value from the previous business 
day, the total value of the financial resources immediately prior to 
the 25 percent decline;
    (C) A breakdown of the value of each financial resource reported in 
each of paragraphs (c)(4)(i)(A) and (B) of this section, calculated in 
accordance with the requirements of Sec.  39.11(d) or Sec.  39.33(b), 
as applicable, including the value of each individual clearing member's 
guaranty fund deposit if the derivatives clearing organization reports 
guaranty fund deposits as a financial resource; and
    (D) A detailed explanation for the decrease.
    (ii) Decrease in liquidity resources. If there is a decrease of 25 
percent or more in the total value of the liquidity resources available 
to satisfy the requirements under Sec.  39.11(e) or Sec.  39.33(c), as 
applicable, either from the last quarterly report submitted under Sec.  
39.11(f) or from the value as of the close of the previous business 
day, a derivatives clearing organization shall report such decrease to 
the Commission no later than one business day following the day the 25 
percent threshold was reached. The report shall include:
    (A) The total value of the liquidity resources as of the close of 
business the day the 25 percent threshold was reached;
    (B) If reporting a decrease in value from the previous business 
day, the total value of the liquidity resources immediately prior to 
the 25 percent decline;
    (C) A breakdown of the value of each liquidity resource reported in 
each of paragraphs (c)(4)(ii)(A) and (B) of this section, calculated in 
accordance with the requirements of Sec.  39.11(e) or Sec.  39.33(c), 
as applicable, including the value of each individual clearing member's 
guaranty fund deposit if the derivatives clearing organization reports 
guaranty fund deposits as a liquidity resource; and
    (D) A detailed explanation for the decrease.
    (iii) Decrease in ownership equity. A derivatives clearing 
organization shall report to the Commission no later than two business 
days prior to an event which the derivatives clearing organization 
knows or reasonably should know will cause a decrease of 20 percent or 
more in ownership equity from the last reported ownership equity 
balance as reported on a quarterly or audited financial statement 
required to be submitted by paragraph (c)(2) or (c)(3)(ii), 
respectively, of this section; but in any event no later than two 
business days after such decrease in ownership equity for events that 
caused the decrease about which the derivatives clearing organization 
did not know and reasonably could not have known prior to the event. 
The report shall include:
    (A) Pro forma financial statements reflecting the derivatives 
clearing organization's estimated future financial condition following 
the anticipated decrease for reports submitted prior to the anticipated 
decrease and current financial statements for reports submitted after 
such a decrease; and
    (B) A detailed explanation for the decrease or anticipated decrease 
in the balance.
    (iv) Six-month liquid asset requirement. A derivatives clearing 
organization shall notify the Commission immediately when the 
derivatives clearing organization knows or reasonably should know of a 
deficit in the six-month liquid asset requirement of Sec.  39.11(e)(2).
    (v) Change in current assets. A derivatives clearing organization 
shall notify the Commission no later than two business days after the 
derivatives clearing organization's current liabilities exceed its 
current assets. The notice shall include a balance sheet that reflects 
the derivatives clearing organization's current assets and current 
liabilities and an explanation as to the reason for the negative 
balance.
    (vi) Request to clearing member to reduce its positions. A 
derivatives clearing organization shall notify the Commission 
immediately of a request by the derivatives clearing organization

[[Page 22276]]

to one of its clearing members to reduce the clearing member's 
positions. The notice shall include:
    (A) The name of the clearing member;
    (B) The time the clearing member was contacted;
    (C) The number of positions for futures and options, and for swaps, 
the number of outstanding trades and notional amount, by which the 
derivatives clearing organization requested the reduction;
    (D) All products that are the subject of the request; and
    (E) The reason for the request.
    (vii) Determination to transfer or liquidate positions. A 
derivatives clearing organization shall notify the Commission 
immediately of a determination by the derivatives clearing organization 
that a position it carries for one of its clearing members must be 
liquidated immediately or transferred immediately, or that the trading 
of any account of a clearing member shall be only for the purpose of 
liquidation because that clearing member has failed to meet an initial 
or variation margin call or has failed to fulfill any other financial 
obligation to the derivatives clearing organization. The notice shall 
include:
    (A) The name of the clearing member;
    (B) The time the clearing member was contacted;
    (C) The products that are subject to the determination;
    (D) The number of positions for futures and options, and for swaps, 
the number of outstanding trades and notional amount, that are subject 
to the determination; and
    (E) The reason for the determination.
    (viii) Default of a clearing member. A derivatives clearing 
organization shall notify the Commission immediately of the default of 
a clearing member. An event of default shall be determined in 
accordance with the rules of the derivatives clearing organization. The 
notice of default shall include:
    (A) The name of the clearing member;
    (B) The products the clearing member defaulted upon;
    (C) The number of positions for futures and options, and for swaps, 
the number of outstanding trades and notional amount, the clearing 
member defaulted upon; and
    (D) The amount of the financial obligation.
    (ix) Change in ownership or corporate or organizational structure--
(A) Reporting requirement. A derivatives clearing organization shall 
report to the Commission any anticipated change in the ownership or 
corporate or organizational structure of the derivatives clearing 
organization or its parent(s) that would:
    (1) Result in at least a 10 percent change of ownership of the 
derivatives clearing organization;
    (2) Create a new subsidiary or eliminate a current subsidiary of 
the derivatives clearing organization; or
    (3) Result in the transfer of all or substantially all of the 
assets of the derivatives clearing organization to another legal 
entity.
    (B) Required information. The report shall include: A chart 
outlining the new ownership or corporate or organizational structure; a 
brief description of the purpose and impact of the change; and any 
relevant agreements effecting the change and corporate documents such 
as articles of incorporation and bylaws.
    (C) Time of report. The report shall be submitted to the Commission 
no later than three months prior to the anticipated change, provided 
that the derivatives clearing organization may report the anticipated 
change to the Commission later than three months prior to the 
anticipated change if the derivatives clearing organization does not 
know and reasonably could not have known of the anticipated change 
three months prior to the anticipated change. In such event, the 
derivatives clearing organization shall immediately report such change 
to the Commission as soon as it knows of such change.
    (D) Confirmation of change report. The derivatives clearing 
organization shall report to the Commission the consummation of the 
change no later than two business days following the effective date of 
the change.
    (x) Change in key personnel. A derivatives clearing organization 
shall report to the Commission no later than two business days 
following the departure or addition of persons who are key personnel as 
defined in Sec.  39.2. The report shall include, as applicable, the 
name and contact information of the person who will assume the duties 
of the position permanently or the person who will assume the duties on 
a temporary basis until a permanent replacement fills the position.
    (xi) Change in legal name. A derivatives clearing organization 
shall report to the Commission no later than two business days 
following a legal name change of the derivatives clearing organization.
    (xii) Change in credit facility funding arrangement. A derivatives 
clearing organization shall report to the Commission no later than one 
business day after the derivatives clearing organization changes a 
credit facility funding arrangement it has in place, or is notified 
that such arrangement has changed, including but not limited to a 
change in lender, change in the size of the facility, change in 
expiration date, or any other material changes or conditions.
    (xiii) Change in liquidity funding arrangement. A derivatives 
clearing organization shall report to the Commission no later than one 
business day after the derivatives clearing organization changes a 
liquidity funding arrangement it has in place, or is notified that such 
arrangement has changed, including but not limited to a change in 
provider, change in the size of the facility, change in expiration 
date, or any other material changes or conditions.
    (xiv) Change in settlement bank arrangements. A derivatives 
clearing organization shall report to the Commission no later than one 
business day after any change in the derivatives clearing 
organization's arrangements with any settlement bank used by the 
derivatives clearing organization or approved for use by the 
derivatives clearing organization's clearing members.
    (xv) Settlement bank issues. A derivatives clearing organization 
shall report to the Commission no later than one business day after any 
material issues or concerns arise regarding the performance, stability, 
liquidity, or financial resources of any settlement bank used by the 
derivatives clearing organization or approved for use by the 
derivatives clearing organization's clearing members.
    (xvi) Change in depositories for customer funds. A derivatives 
clearing organization shall report to the Commission no later than one 
business day after any change in the derivatives clearing 
organization's arrangements with any depository of customer funds.
    (xvii) Sanctions against a clearing member. A derivatives clearing 
organization shall provide notice to the Commission no later than two 
business days after the derivatives clearing organization imposes 
sanctions against a clearing member.
    (xviii) Financial condition and events. A derivatives clearing 
organization shall provide to the Commission immediate notice after the 
derivatives clearing organization knows or reasonably should have known 
of:
    (A) The institution of any legal proceedings which may have a 
material adverse financial impact on the derivatives clearing 
organization;
    (B) Any event, circumstance or situation that materially impedes 
the derivatives clearing organization's ability to comply with this 
part and is not otherwise required to be reported under this section; 
or

[[Page 22277]]

    (C) A material adverse change in the financial condition of any 
clearing member that is not otherwise required to be reported under 
this section.
    (xix) Financial statements material inadequacies. A derivatives 
clearing organization shall provide notice to the Commission within 24 
hours if the derivatives clearing organization discovers or is notified 
by an independent public accountant of the existence of any material 
inadequacy in a financial statement, and within 48 hours after giving 
such notice provide a written report stating what steps have been and 
are being taken to correct the material inadequacy.
    (xx) Change in fiscal year. A derivatives clearing organization 
shall provide to the Commission immediate notice of any change to the 
start and end dates of its fiscal year.
    (xxi) Change in independent accounting firm. A derivatives clearing 
organization shall report to the Commission no later than one business 
day after any change in the derivatives clearing organization's 
independent public accounting firm. The report shall include the date 
of such change, the name and contact information of the new firm, and 
the reason for the change.
    (xxii) Major decision of the board of directors. A derivatives 
clearing organization shall report to the Commission any major decision 
of the derivatives clearing organization's board of directors as 
required by Sec.  39.24(a)(3)(i).
    (xxiii) System safeguards. A derivatives clearing organization 
shall report to the Commission:
    (A) Exceptional events as required by Sec.  39.18(g); or
    (B) Planned changes as required by Sec.  39.18(h).
    (xxiv) Margin model issues. A derivatives clearing organization 
shall report to the Commission no later than one business day after any 
issue occurs with a DCO's margin model, including margin models for 
cross-margined portfolios, that affects the DCO's ability to calculate 
or collect initial margin or variation margin.
    (xxv) Recovery and wind-down plans. A derivatives clearing 
organization that is required to maintain recovery and wind-down plans 
pursuant to Sec.  39.39(b) shall submit its plans to the Commission no 
later than the date on which the derivatives clearing organization is 
required to have the plans. A derivatives clearing organization that is 
not required to maintain recovery and wind-down plans pursuant to Sec.  
39.39(b), but which nonetheless maintains such plans, may choose to 
submit its plans to the Commission. A derivatives clearing organization 
that has submitted its recovery and wind-down plans to the Commission 
shall, upon making any revisions to the plans, submit the revised plans 
to the Commission along with a description of the changes and the 
reason for those changes.
    (xxvi) New product accepted for clearing. A derivatives clearing 
organization shall provide notice to the Commission no later than 30 
calendar days prior to accepting a new product for clearing. The notice 
shall include:
    (A) A brief description of the new product;
    (B) The date on which the derivatives clearing organization intends 
to begin accepting the new product for clearing;
    (C) A statement as to whether the new product will require the 
derivatives clearing organization to submit any rule changes pursuant 
to Sec.  40.5 or Sec.  40.6, and Sec.  40.10, as applicable, of this 
chapter;
    (D) A statement as to whether the derivatives clearing organization 
has informed, or intends to inform, its clearing members and/or the 
general public of the new product and, if written notice was given, a 
web address for or copy of such notice; and
    (E) An explanation of any substantive opposing views received and 
how the derivatives clearing organization addressed such views or 
objections.
    (5) Requested reporting. A derivatives clearing organization shall 
provide upon request by the Commission and within the time specified in 
the request:
    (i) Any information related to its business as a clearing 
organization, including information relating to trade and clearing 
details.
    (ii) A written demonstration, containing supporting data, 
information and documents, that the derivatives clearing organization 
is in compliance with one or more core principles and relevant 
provisions of this part.
0
19. In Sec.  39.20, revise paragraphs (a) introductory text and (b) to 
read as follows:


Sec.  39.20  Recordkeeping.

    (a) Requirement to maintain information. A derivatives clearing 
organization shall maintain records of all activities related to its 
business as a derivatives clearing organization. Such records shall 
include, but are not limited to, records of:
* * * * *
    (b) Form and manner of maintaining information--(1) General. The 
records required to be maintained by this chapter shall be maintained 
in accordance with the provisions of Sec.  1.31 of this chapter, for a 
period of not less than 5 years, except as provided in paragraph (b)(2) 
of this section.
    (2) Exception for swap data. A derivatives clearing organization 
that clears swaps must maintain swap data in accordance with the 
requirements of part 45 of this chapter.
0
20. Revise Sec.  39.21 to read as follows:


Sec.  39.21  Public information.

    (a) General. A derivatives clearing organization shall provide to 
market participants sufficient information to enable the market 
participants to identify and evaluate accurately the risks and costs 
associated with using the services of the derivatives clearing 
organization. In furtherance of the objective in this paragraph (a), a 
derivatives clearing organization shall have clear and comprehensive 
rules and procedures.
    (b) Availability of information. A derivatives clearing 
organization shall make information concerning the rules and the 
operating and default procedures governing the clearing and settlement 
systems of the derivatives clearing organization available to market 
participants.
    (c) Public disclosure. A derivatives clearing organization shall 
make the following information readily available to the general public, 
in a timely manner, by posting such information on the derivatives 
clearing organization's website, unless otherwise permitted by the 
Commission:
    (1) The terms and conditions of each contract, agreement, and 
transaction cleared and settled by the derivatives clearing 
organization;
    (2) Each clearing and other fee that the derivatives clearing 
organization charges its clearing members;
    (3) Information concerning its margin-setting methodology;
    (4) The size and composition of the financial resource package 
available in the event of a clearing member default, updated as of the 
end of the most recent fiscal quarter or upon Commission request and 
posted concurrently with submission of the report to the Commission 
under Sec.  39.11(f)(1)(i)(A);
    (5) Daily settlement prices, volume, and open interest for each 
contract, agreement, or transaction cleared or settled by the 
derivatives clearing organization, posted no later than the business 
day following the day to which the information pertains;
    (6) The derivatives clearing organization's rulebook, including 
rules and procedures for defaults in accordance with Sec.  39.16;
    (7) A current list of all clearing members;
    (8) A list of all swaps that the derivatives clearing organization 
will

[[Page 22278]]

accept for clearing that identifies which swaps on the list are 
required to be cleared, in accordance with Sec.  50.3(a) of this 
chapter; and
    (9) Any other information that is relevant to participation in the 
clearing and settlement activities of the derivatives clearing 
organization.
0
21. Revise Sec.  39.22 to read as follows:


Sec.  39.22  Information sharing.

    A derivatives clearing organization shall enter into, and abide by 
the terms of, each appropriate and applicable domestic and 
international information-sharing agreement, and shall use relevant 
information obtained from each such agreement in carrying out the risk 
management program of the derivatives clearing organization.
0
22. Add Sec.  39.24 to read as follows:


Sec.  39.24  Governance.

    (a) General. (1) A derivatives clearing organization shall have 
governance arrangements that:
    (i) Are written;
    (ii) Are clear and transparent;
    (iii) Place a high priority on the safety and efficiency of the 
derivatives clearing organization; and
    (iv) Explicitly support the stability of the broader financial 
system and other relevant public interest considerations of clearing 
members, customers of clearing members, and other relevant 
stakeholders.
    (2) The board of directors shall make certain that the derivatives 
clearing organization's design, rules, overall strategy, and major 
decisions appropriately reflect the legitimate interests of clearing 
members, customers of clearing members, and other relevant 
stakeholders.
    (3) To the extent consistent with other statutory and regulatory 
requirements on confidentiality and disclosure:
    (i) Major decisions of the board of directors shall be clearly 
disclosed to clearing members, other relevant stakeholders, and to the 
Commission; and
    (ii) Major decisions of the board of directors having a broad 
market impact shall be clearly disclosed to the public.
    (b) Governance arrangement requirements. A derivatives clearing 
organization shall have governance arrangements that:
    (1) Are clear and documented;
    (2) To an extent consistent with other statutory and regulatory 
requirements on confidentiality and disclosure, are disclosed, as 
appropriate, to the Commission, other relevant authorities, clearing 
members, customers of clearing members, owners of the derivatives 
clearing organization, and to the public;
    (3) Describe the structure pursuant to which the board of 
directors, committees, and management operate;
    (4) Include clear and direct lines of responsibility and 
accountability;
    (5) Clearly specify the roles and responsibilities of the board of 
directors and its committees, including the establishment of a clear 
and documented risk management framework;
    (6) Clearly specify the roles and responsibilities of management;
    (7) Describe procedures pursuant to which the board of directors 
oversees the chief risk officer, risk management committee, and 
material risk decisions;
    (8) Provide risk management and internal control personnel with 
sufficient independence, authority, resources, and access to the board 
of directors so that the operations of the derivatives clearing 
organization are consistent with the risk management framework 
established by the board of directors;
    (9) Assign responsibility and accountability for risk decisions, 
including in crises and emergencies; and
    (10) Assign responsibility for implementing the:
    (i) Default rules and procedures required by Sec. Sec.  39.16 and 
39.35, as applicable;
    (ii) System safeguard rules and procedures required by Sec. Sec.  
39.18 and 39.34, as applicable; and
    (iii) Recovery and wind-down plans required by Sec.  39.39, as 
applicable.
    (c) Fitness standards. (1) A derivatives clearing organization 
shall establish and enforce appropriate fitness standards for:
    (i) Directors;
    (ii) Members of any disciplinary committee;
    (iii) Members of the derivatives clearing organization;
    (iv) Any other individual or entity with direct access to the 
settlement or clearing activities of the derivatives clearing 
organization; and
    (v) Any other party affiliated with any individual or entity 
described in this paragraph.
    (2) A derivatives clearing organization shall maintain policies to 
make certain that:
    (i) The board of directors consists of suitable individuals having 
appropriate skills and incentives;
    (ii) The performance of the board of directors and the performance 
of individual directors is reviewed on a regular basis; and
    (iii) Managers have the appropriate experience, skills, and 
integrity necessary to discharge operational and risk management 
responsibilities.
0
23. Add Sec.  39.25 to read as follows:


Sec.  39.25  Conflicts of interest.

    A derivatives clearing organization shall:
    (a) Establish and enforce rules to minimize conflicts of interest 
in the decision-making process of the derivatives clearing 
organization;
    (b) Establish a process for resolving such conflicts of interest; 
and
    (c) Describe procedures for identifying, addressing, and managing 
conflicts of interest involving members of the board of directors.
0
24. Add Sec.  39.26 to read as follows:


Sec.  39.26  Composition of governing boards.

    A derivatives clearing organization shall ensure that the 
composition of the governing board or board-level committee of the 
derivatives clearing organization includes market participants and 
individuals who are not executives, officers, or employees of the 
derivatives clearing organization or an affiliate thereof. For purposes 
of this section, ``market participant'' means any clearing member of 
the derivatives clearing organization or customer of a clearing member, 
or an employee, officer, or director of such an entity.
0
25. In Sec.  39.27, revise paragraph (c) to read as follows:


Sec.  39.27  Legal risk considerations.

* * * * *
    (c) Conflict of laws. If a derivatives clearing organization 
provides clearing services outside the United States:
    (1) The derivatives clearing organization shall identify and 
address any material conflict of law issues. The derivatives clearing 
organization's contractual agreements shall specify a choice of law.
    (2) The derivatives clearing organization shall be able to 
demonstrate the enforceability of its choice of law in relevant 
jurisdictions and that its rules, procedures, and contracts are 
enforceable in all relevant jurisdictions.
    (3) The derivatives clearing organization shall ensure on an 
ongoing basis that the memorandum required in paragraph (b) of Exhibit 
R to appendix A to this part is accurate and up to date and shall 
submit an updated memorandum to the Commission promptly following all 
material changes to the analysis or content contained in the 
memorandum.


Sec.  39.32  [Removed and Reserved]

0
26. Remove and reserve Sec.  39.32.
0
27. In Sec.  39.33, revise paragraphs (a)(1) and (c)(1)(i), and add 
paragraph (d)(5) to read as follows:

[[Page 22279]]

Sec.  39.33  Financial resources requirements for systemically 
important derivatives clearing organizations and subpart C derivatives 
clearing organizations.

    (a) * * *
    (1) Notwithstanding the requirements of Sec.  39.11(a)(1), each 
systemically important derivatives clearing organization and subpart C 
derivatives clearing organization that, in either case, is systemically 
important in multiple jurisdictions or is involved in activities with a 
more complex risk profile shall maintain financial resources sufficient 
to enable it to meet its financial obligations to its clearing members 
notwithstanding a default by the two clearing members creating the 
largest combined financial exposure to the derivatives clearing 
organization in extreme but plausible market conditions.
* * * * *
    (c) * * *
    (1) * * *
    (i) Notwithstanding the provisions of Sec.  39.11(e)(1)(ii), each 
systemically important derivatives clearing organization and subpart C 
derivatives clearing organization shall maintain eligible liquidity 
resources, in all relevant currencies, that, at a minimum, will enable 
it to meet its intraday, same-day, and multiday obligations to perform 
settlements, as defined in Sec.  39.14(a)(1), with a high degree of 
confidence under a wide range of stress scenarios that should include, 
but not be limited to, a default by the clearing member creating the 
largest aggregate liquidity obligation for the systemically important 
derivatives clearing organization or subpart C derivatives clearing 
organization in extreme but plausible market conditions.
* * * * *
    (d) * * *
    (5) A systemically important derivatives clearing organization with 
access to accounts and services at a Federal Reserve Bank, pursuant to 
section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use such 
accounts and services where practical.
* * * * *
0
28. In Sec.  39.36, revise paragraphs (a)(5)(ii), (a)(6), (b)(2)(ii), 
(d) and (e) to read as follows:


Sec.  39.36  Risk management for systemically important derivatives 
clearing organizations and subpart C derivatives clearing 
organizations.

    (a) * * *
    (5) * * *
    (ii) Using the results to assess the adequacy of, and to adjust, 
its total amount of financial resources; and
    (6) Use the results of stress tests to support compliance with the 
minimum financial resources requirement set forth in Sec.  39.11(a)(1) 
or Sec.  39.33(a), as applicable.
    (b) * * *
    (2) * * *
    (ii) Testing of the ability of the models or model components to 
react appropriately using actual or hypothetical datasets and assessing 
the impact of different model parameter settings.
* * * * *
    (d) Margin model assessment. Each systemically important 
derivatives clearing organization and subpart C derivatives clearing 
organization shall conduct, on at least an annual basis (or more 
frequently if there are material relevant market developments), an 
assessment of the theoretical and empirical properties of its margin 
model for all products it clears.
    (e) Independent validation. Each systemically important derivatives 
clearing organization and subpart C derivatives clearing organization 
shall perform, on an annual basis, a full validation of its financial 
risk management model and its liquidity risk management model.
* * * * *
0
29. In Sec.  39.37, revise paragraphs (b) and (c) to read as follows:


Sec.  39.37  Additional disclosure for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations.

* * * * *
    (b)(1) Review and update its responses disclosed as required by 
paragraph (a) of this section at least every two years and following 
material changes to the systemically important derivatives clearing 
organization's or subpart C derivatives clearing organization's system 
or the environment in which it operates. A material change to the 
systemically important derivatives clearing organization's or subpart C 
derivatives clearing organization's system or the environment in which 
it operates is a change that would significantly change the accuracy 
and usefulness of the existing responses; and
    (2) Provide notice to the Commission of updates to its responses 
required by paragraph (b)(1) of this section following material changes 
no later than ten business days after the updates are made. Such notice 
shall be accompanied by a copy of the text of the responses that shows 
all deletions and additions made to the immediately preceding version 
of the responses;
    (c) Disclose, publicly and to the Commission, relevant basic data 
on transaction volume and values consistent with the standards set 
forth in the Public Quantitative Disclosure Standards for Central 
Counterparties published by the Committee on Payments and Market 
Infrastructures and the International Organization of Securities 
Commissions;
* * * * *
0
30. In Sec.  39.39, revise paragraph (a)(2) to read as follows:


Sec.  39.39  Recovery and wind-down for systemically important 
derivatives clearing organizations and subpart C derivatives clearing 
organizations.

    (a) * * *
    (2) Wind-down means the actions of a systemically important 
derivatives clearing organization or subpart C derivatives clearing 
organization to effect the permanent cessation or sale or transfer of 
one or more services.
* * * * *
0
31. Revise appendix A to part 39 to read as follows:

Appendix A to Part 39--Form DCO Derivatives Clearing Organization 
Application for Registration

BILLING CODE 6351-01-P

[[Page 22280]]

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0
32. Revise appendix B to part 39 to read as follows:

Appendix B to Part 39--Subpart C Election Form

[[Page 22308]]

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BILLING CODE 6351-01-C

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
33. The authority citation for part 140 continues to read as follows:

    Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and 
16(b).

0
34. In Sec.  140.94, revise paragraph (c) to read as follows:


Sec.  140.94  Delegation of authority to the Director of the Division 
of Swap Dealer and Intermediary Oversight and the Director of the 
Division of Clearing and Risk.

* * * * *
    (c) The Commission hereby delegates, until such time as the 
Commission orders otherwise, the following function to the Director of 
the Division of Clearing and Risk and to such members of the 
Commission's staff acting under his or her direction as he or she may 
designate from time to time:
    (1) The authority to review applications for registration as a 
derivatives clearing organization filed with the Commission under Sec.  
39.3(a)(1) of this chapter, to determine that an application is 
materially complete pursuant to Sec.  39.3(a)(2) of this chapter, to 
request additional information in support of an application pursuant to 
Sec.  39.3(a)(3) of this chapter, to extend the review period for an 
application pursuant to Sec.  39.3(a)(6) of this chapter, to stay the 
running of the 180-day review period if an application is incomplete 
pursuant to Sec.  39.3(b)(1) of this chapter, to review requests for 
amendments to orders of registration filed with the Commission under 
Sec.  39.3(d)(1) of this chapter, to request additional information in 
support of a request for an amendment to an order of registration 
pursuant to Sec.  39.3(d)(2) of this chapter, and to request additional 
information in support of a rule submission pursuant to Sec.  
39.3(g)(3) of this chapter;
    (2) All functions reserved to the Commission in Sec.  39.4(a) of 
this chapter;
    (3) All functions reserved to the Commission in Sec.  39.5(b)(2), 
(b)(3)(ix), (c)(1), and (d)(3) of this chapter;
    (4) All functions reserved to the Commission in Sec.  
39.10(c)(4)(iv) of this chapter;
    (5) All functions reserved to the Commission in Sec.  
39.11(b)(1)(v), (b)(2)(ii), (c)(1) and (3), and (f)(1), and (2) of this 
chapter;
    (6) All functions reserved to the Commission in Sec.  
39.12(a)(5)(iii) of this chapter;
    (7) All functions reserved to the Commission in Sec.  
39.13(g)(8)(ii), (h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii), and 
(h)(5)(i)(C) of this chapter;
    (8) The authority to request additional information in support of a 
rule submission under Sec. Sec.  39.13(i)(2) and 39.15(b)(2)(iii) of 
this chapter;
    (9) All functions reserved to the Commission in Sec.  39.19(c)(2), 
(c)(3)(iv), and (c)(5) of this chapter;
    (10) All functions reserved to the Commission in Sec.  39.20(a)(5) 
of this chapter;
    (11) All functions reserved to the Commission in Sec.  39.21(c) of 
this chapter;
    (12) All functions reserved to the Commission in Sec.  39.31 of 
this chapter; and
    (13) The authority to approve the requests described in Sec. Sec.  
39.34(d) and 39.39(f) of this chapter.
* * * * *

    Issued in Washington, DC, on April 29, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Derivatives Clearing Organization General Provisions and 
Core Principles--Commission Voting Summary, Chairman's Statement, and 
Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Swaps clearing is among the most sweeping and significant of the 
swaps reforms adopted by the Dodd-Frank Act. By any measure, the 
CFTC's swaps clearing regime has been robust and highly successful.
    In 2011 and 2013, the Commission adopted regulations in part 39 
to implement the Dodd-Frank Act's Core Principles for Derivatives 
Clearing Organizations (DCOs). Since the adoption of these rules, 
Commission staff has worked with DCOs regarding questions concerning 
the interpretation and implementation of the regulations, and issued 
related staff relief or guidance.
    As part of Project KISS, the Commission is proposing to revise 
or delete certain provisions in part 39. These revisions will 
improve the clarity of the text, codify staff relief and guidance, 
and simplify processes for registration or reporting. There are also 
a few new requirements with respect to default procedures and 
reporting in response to more recent events, such as the launch of 
bitcoin futures contracts and the Nasdaq Clearing default. For these 
reasons, I support this proposal.

Appendix 3--Statement of Commissioner Dan M. Berkovitz

Introduction

    I support issuing for public comment the notice of proposed 
rulemaking (``NPRM'') to amend certain provisions of part 39 of the 
Commission's regulations governing derivatives clearing 
organizations (``DCOs''). Part 39 generally covers registration and 
regulation of DCOs that centrally clear futures, options, and swaps 
regulated by the Commission.
    The NPRM includes a number of beneficial provisions. I commend 
the staff of the Division of Clearing and Risk for this important 
effort to clarify and clean up some issues in the rules and staff 
guidance that have accumulated since part 39 was substantively 
amended in 2011 and 2013. The NPRM also proposes several changes to 
the regulations that merit scrutiny as outlined below. I 
particularly look forward to comments on those provisions to help 
guide the Commission's deliberations on the proposed amendments.

Background

    Central clearing of futures positions has been a fundamental 
risk mitigation measure for derivatives market participants in the 
United States for well over a hundred years. In more recent times, 
as futures and swap trading has grown dramatically,\1\ central 
clearing of derivatives including swaps has become a critical 
element in risk management of the financial system as a whole. In 
response to the 2008 financial crisis, world leaders at the G20 
summit in Pittsburgh established central clearing for derivatives as 
a core objective in mitigating systemic risk.\2\ DCOs are a critical 
component of the clearing infrastructure, and effective 
clearinghouse registration and regulation is key to facilitating 
efficient, sound derivatives markets and preventing another 
financial crisis.
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    \1\ A CFTC study published in 1998 noted that an estimated 272 
million futures and options contracts were traded globally in 1986, 
while recent Futures Industry Association data indicates that 30.28 
billion futures and options contracts were traded globally in 2018. 
See CFTC, Division of Economic Analysis, The Global Competitiveness 
of U.S. Futures Markets Revisited (November 1999); available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/plstudy_53_cftc.pdf; FIA Releases Annual Trading 
Statistics showing Record [Exchange Traded Derivatives] Volume in 
2018; available at https://fia.org/articles/fia-releases-annual-trading-statistics-showing-record-etd-volume-2018. Similarly, the 
trading of over-the-counter derivatives expanded from about $72 
trillion in notional amount in 1998 to about $595 trillion in 2018. 
See Bank of International Settlements, OTC derivatives notional 
amount outstanding by risk category; available at https://stats.bis.org/statx/srs/tseries/OTC_DERIV/H:A:A:A:5J:A:5J:A:TO1:TO1:A:A:3:C?t=D5.1&p=20172&x=DER_RISK.3.CL_MARKET_RISK.T:B:D:A&o=w:19981.,s:line.nn,t:Derivatives%20risk%20category.

    \2\ See G20, Leaders' Statement: The Pittsburgh Summit (Sept. 
24-25, 2009); available at https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
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    As described in the NPRM, the Commission adopted regulations in 
2011 and

[[Page 22317]]

2013 to further implement DCO core principles and Title VIII of the 
Dodd-Frank Act. Based on experience in implementing these 
regulations and subsequent developments, including the establishment 
of international principles for clearing, the CFTC staff has 
provided guidance on the new regulations. It is now appropriate for 
the Commission to address this experience and these developments 
through amendments to our regulations.

Codification and Clarification

    The NPRM includes numerous amendments that clarify, further 
define, or provide more explicit direction to market participants. 
Governance requirements are more fully developed and applied across 
all DCOs. The NPRM adds new regulations 39.24, 39.25, and 39.26 that 
establish governance requirements for DCOs to better ensure that 
DCOs are well managed.\3\ These amendments provide greater certainty 
and uniform rules, and are important not only for fairness and 
consistency, but to improve risk management across the clearing 
space. The changes may help guard against risks from governance 
failures.
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    \3\ See NPRM section IV.J.
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    While the new governance regulations are beneficial, many of the 
provisions set out only general principles and do not provide 
specific guidance or prescriptive standards. I look forward to 
public comment on whether more explicit guidance or requirements 
would be appropriate for any specific provisions. In particular, I 
look forward to comments on whether members should play a larger 
role in governance.
    Under the NPRM, regulation 39.16 would be amended to improve 
requirements around member default management.\4\ The recent member 
default at NASDAQ Clearing reinforces the importance of default 
management mechanisms and information sharing when a default 
occurs.\5\ The amendments explicitly require DCOs to have a default 
committee that must include clearing members. In addition, the 
amendments would require a DCO to include members in tests of the 
default management plan. I look forward to comments on how and when 
DCO members should be included in default management.
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    \4\ See NPRM section IV.F.
    \5\ See Luke Clancy, Margin or membership? Regulators react to 
Nasdaq default, Risk.net (Feb. 7, 2019) available at: https://www.risk.net/regulation/6366441/margin-or-membership-regulators-react-to-nasdaq-default.
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    In addition to the above, the NPRM would provide a number of 
more discrete improvements, such as an explicit requirement for 
initial margin to cover concentration risk; a requirement for DCO 
personnel to certify certain reports; and several new reporting 
requirements around settlement bank arrangements, depositories, and 
liquidity funding arrangements. Clarifying these types of issues 
will help maintain consistent, objective, and transparent oversight 
of registered DCOs.

Issues Warranting Further Comment and Consideration

    The NPRM includes several proposed amendments that, while 
beneficial in some respects, may also present additional issues for 
the Commission to consider in developing the final rule. Comments in 
these areas would be particularly helpful to inform the Commission 
in its deliberations.
    Changes to regulation 39.13(g)(8) regarding calculation of 
initial margin and in particular, excess margin, attempt to 
incorporate in the regulation, and to clarify, staff guidance.\6\ 
Getting initial margin calculations right is critical to providing 
sufficient resources to cover variation margin shortfalls that may 
occur when resolving a member's default. The proposed standard for 
margin to be ``commensurate with the risk presented by each customer 
account,'' as a principle, seems appropriate. However, little 
guidance is provided on how that principle should be applied or the 
appropriate parameters for consideration. Given the importance of 
initial margin calculations, I look forward to comments on whether 
the Commission should provide a more detailed standard in the 
regulation or further guidance on the calculation.
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    \6\ See NPRM section IV.D.3.f.
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    New regulation 39.13(i) provides explicit procedures and 
requirements for filing DCO rules to implement a cross-margining 
program with other clearing organizations.\7\ From a general policy 
perspective, establishing explicit procedures in regulation for 
evaluating such arrangements would facilitate consistent, objective 
reviews by the Commission.
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    \7\ See NPRM section IV.D.5.
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    However, multi-entity cross-margining--which could cross borders 
and involve multiple regulatory regimes of different regulators--
creates additional layers of legal, operational, and financial risk 
that may be difficult to evaluate. The members of the DCO could be 
affected in ways not previously contemplated and that may be more 
obscure to the members and difficult for them to assess. The 
information that the DCO would be required to provide to the 
Commission under the NPRM is fashioned from less complex portfolio 
margining evaluation requirements and is general in nature. Will a 
bankruptcy involving a member of one of the clearing organizations, 
the DCO, or the other clearing organization affect the other entity 
and its members in ways that are not anticipated? Are there margin 
model risks, such as greater concentration risk across both 
entities, that are not properly accounted for in the proposed 
regulations? Do members of the DCO have other concerns and do they 
have appropriate mechanisms to voice those concerns through the DCO 
rules, governance structures, and/or CFTC review procedures? I look 
forward to reviewing the comments on these and other issues 
regarding the proposed multi-entity cross margining regulations.
    Finally, the NPRM would establish regulation 40.5 as the 
mechanism for Commission review of certain DCO rule sets including: 
(1) A request to transfer a DCO's open interest--in many cases its 
entire open interest, (2) cross-margining programs among different 
clearing organizations--including across borders and for entities 
subject to different regulators, and (3) commingling of futures, 
options, and swaps positions in a section 4d(a) futures account. 
These rule reviews could involve consideration of novel issues, 
customer protections, and other factors. Accordingly, I have some 
concern that regulation 40.5 may not provide sufficiently robust 
review procedures or the Commission with adequate authority to 
require a DCO to mitigate risks arising from the proposed actions.
    Section 40.5 was intended to address voluntary submission of DCO 
rule changes pursuant to section 5c(c) of the Commodity Exchange 
Act. While the process for submission and Commission review is more 
detailed under regulation 40.5 than under regulation 40.6, 
regulation 40.5 provides for automatic approval after 45 days if 
that period is not extended by the Commission and a narrow standard 
of review; namely, the Commission shall approve a DCO rule under 
review unless it ``is inconsistent with the [Commodity Exchange] Act 
or Commission's regulations.'' However, the DCO activities to which 
this review procedure would be applied under the NPRM are 
significant actions that likely will raise customer protection 
concerns, entail a sophisticated risk management analysis, and call 
for a more nuanced review and response than can be accomplished 
under the blunt ``inconsistent with the CEA'' standard that governs 
the Commission under regulation 40.5.
    Accordingly, I encourage comments on whether regulation 40.5 is 
the appropriate mechanism to review these proposed DCO actions or 
whether a more balanced procedure should be employed that would 
provide the Commission more flexibility to ensure the proposed 
actions adequately address issues involving customer protection, 
potential risks to FCMs, and market integrity.

Conclusion

    In conclusion, I commend the staff of the Division of Clearing 
and Risk for their efforts in preparing the NPRM to codify practices 
that are currently addressed through staff guidance and to conform 
our regulations to developments that have occurred since the 
regulations were issued. The NPRM will help clarify and provide 
explicit rules for clearing organizations that provide a vital 
service to derivatives markets. Finally, I look forward to the 
public comments on the NPRM, particularly on the proposed amendments 
discussed above.

[FR Doc. 2019-09025 Filed 5-15-19; 8:45 am]
 BILLING CODE 6351-01-P